Taxing Times
CPAs Look to the Future of the AMT

By Simon Eskow

NEW YORK—Existing efforts to reform the alternative minimum tax (AMT) have been characterized by some observers as a Band-Aid approach to fixing an endemic problem. There currently are at least three bills in the House of Representatives aiming to correct problems with the AMT, which was passed into law more than 33 years ago.

New York State Society of CPAs members who are familiar with the legislation being cranked out in Washington believe that even if such bills were eventually to be voted into law, current proposed legislation is not far-reaching enough.

Alan Dlugash, chairman of the Society’s Taxation of Individuals Committee, said that some approaches, such as a proposal to allow deductions for local and state taxes, are a good start, but overall there aren’t any bills that tackle the AMT as a whole. “There haven’t been any comprehensive proposals,” Dlugash said. “There has not been one piece of proposed legislation that addresses these things.”

The situation is becoming increasingly crucial as more people fall into the AMT. According to the Brookings Tax Policy Center, AMT will affect 11.6 million people in 2005 and perhaps more than 29 million taxpayers by 2010.

Last May, Congress referred a bill, H.R. 4227, to the Senate. The bill calls for amending the Internal Revenue Code of 1986 to extend AMT relief to 2005 and index it to inflation. But, Dlugash said, this bill only provides an exemption for a certain group of people, which is what he called a Band-Aid approach to fixing the AMT.

The main problems, he said, are that the rates have to be adjusted to conform to changes in the regular tax code. When Congress passed the Tax Act of 1986, it didn’t make adjustments to the AMT, forcing more people into the AMT as tax brackets fell but baseline AMT rates remained the same. Dlugash, a partner with Marks Paneth and Shron LLP, added that there must be an adjustment for inflation, allowance for miscellaneous deductions and deductions for state, local and real estate taxes.

Meanwhile, the AMT Middle Class Fairness Act of 2004 (H. R. 4629) would permit deductions for state and local taxes and adjust exemption amounts to inflation; while the AMT Tax Repeal Act of 2004 (H.R.4131) would limit the increase in the number of individuals affected by the AMT and phase it out completely by 2014.

These bills, as of this writing, remain in the House Ways and Means Committee, where they are likely to languish for the foreseeable future.

“At this point before an election, you don’t know what to say, you don’t know what’s going to happen,” said Franklin Federmann, a member of the Society’s Tax Division Oversight Committee. “I don’t look for any legislation of consequence when the election is in full steam. Next year I expect to see a lot of initiatives, after the election, but what that will be depends on who wins.”

No matter what the outcome, though, Federmann doesn’t foresee much broad support building for overhauling the AMT. If the AMT has become the bane of taxpayers’ existence in New York, California, and a smattering of metropolises like Chicago, it means very little to most voters in other states where lower taxes, costs of living and income mean fewer people are affected right now.

“It’s highly unlikely that anyone will get too excited about it if they’re not from the high-tax states,” said Federmann, a sole practitioner in Ronkonkoma, N.Y.

In New York, where state and local taxes can amount to 10 percent, it’s not unusual for people with modest incomes to become “victims to this tax,” Federmann said. New homebuyers often fail to consider the cap that AMT puts on deductions when deciding if they can service a mortgage.

“So now they have a problem where they have a (relatively) modest income but they no longer can afford the home they bought,” Federmann said.

A problem with correcting the AMT, Federmann said, is a misperception that the AMT affects very wealthy people, despite the inequity in the system that “can cause enormous economic hardship.”

“As soon as you make something deductible or you make some changes to the law, it kicks people closer to the AMT faster,” said Jim McEvoy, who is chairing the Society’s AMT Task Force. “And more and more people are in the AMT.”

Combined with the lack of nationwide pressure to correct AMT is a government in search of revenue at a time of increased expenditures, lower tax rates after the 2001 tax breaks, and a widening deficit.

“It raises so much money for the government,” said Alan E. Weiner, the head of a tax simplification task force last year. “It’s just a fact that AMT brings in a ton of money.”

According to the Brookings Institute, outright repeal in 2005 would cost the government $660 billion in revenue through 2014, if the 2001 tax cuts expire in 2010, and more than $1 trillion if the tax cut is extended.

With so much money at stake, the question of how to reform AMT while maintaining revenue becomes complicated. In Weiner’s view, this requires initiatives from the administration.

“There’s a lot of talk out there but nobody is doing anything about it,” Weiner, a partner with Holtz Rubenstein and Co. LLP, said. “Unless the administration puts its might behind it, it’s not going to happen.”

Until adequately reformed, the AMT will increasingly dominate the national tax picture. However, there remain several other outstanding issues that are no less on the minds of certain taxpaying individuals and businesses. Next month, The Trusted Professional will examine these items, including the $100,000 small business expensing limitation set to expire in 2006, the economic impact of the new capital gains and dividends rates, the likelihood for repeal of the estate tax, and the financial incentives of proposed lifetime savings accounts.