March 22, 2007, the House Select Revenue Measures Subcommittee
held its second hearing on the individual alternative minimum
tax (AMT), focusing on its effect on families. The AICPA was
represented by Joseph W. Walloch, incoming chair of the AICPA
Individual Income Tax Technical Resource Panel (TRP), CEO of
Walloch & Associates, CPAs, in Redlands, CA, and Professor
of Advanced Taxation at the University of California,
Riverside. Three other CPAs also testified—David Lifson,
incoming chair of the New York State Society of CPAs and
member of the AICPA Tax Division’s Tax Legislation &
Policy Committee; Margaret Rauh, member of the AICPA Tax
Division’s Trust, Estate & Gift Tax TRP; and Jon Nixon,
AICPA member. Art Auerbach, an AICPA Tax Division Individual
Income Tax TRP member, accompanied one of his clients, who
served as a witness. Across the board, the message to Congress
was, “Repeal the AMT.” (To access the testimony, visit
Growing Effect of the AMT
The IRS National Taxpayer Advocate, Nina Olson, has reported that:
[w]hile approximately 4 million taxpayers were subject to AMT in 2006, it is projected that in 2007, absent a change in law, 23.4 million individual taxpayers—or about 26 percent of individual filers who pay income tax—are likely to be subject to the AMT. Among the categories of taxpayers projected to be hardest hit, 89 percent of married couples with adjusted gross incomes between $75,000 and $100,000 and two or more children are expected to owe AMT. Married taxpayers will be almost 15 times as likely as single taxpayers to pay AMT in 2007.
A case in point is Klaassen, 182 F3d 932 (10th Cir. 1999). David and Margaret Klaassen claimed 12 exemptions on their 1994 return, for themselves and their 10 children. Their adjusted gross income (AGI) was $83,056. The taxpayers were not wealthy, nor did they use tax shelters to reduce their income tax. They were assessed $1,085 in AMT, because the AMT calculation did not allow them to claim (1) 12 personal exemptions, (2) $3,264 in state and local taxes and (3) a portion of the otherwise-deductible medical expenses of their large family, including $2,076 in out-of-pocket medical expenses for treatment of their son’s cancer.
As a result of their growing family, the Klaassens claimed 13 exemptions in 1995, 14 in 1996 and 1997, and 15 in 1998–2001. In 2002 and 2003, their total personal exemptions fell to 14. They were allowed all of their personal exemptions for regular tax purposes, because their AGI for each of these tax years was well below the threshold for reducing personal exemptions for regular tax purposes. Despite this, the AMT’s convoluted math eliminated all of the personal exemptions to which they were otherwise entitled each year. The AMT cost the Klaassen family more than $25,000 over 10 years.
In its testimony, the AICPA noted that due to its increasing complexity, effect on unintended taxpayers and compliance problems, the AMT should be repealed. However, it recognizes that simply eliminating the AMT would generate a new set of problems, given the large loss of tax revenue that would occur. If repeal is not possible, the AICPA urges Congress to consider the following alternative solutions to reduce or eliminate most of the complexity and unfair effect of the current AMT:
1. Increase and index for inflation the AMT brackets and exemption amounts, and eliminate phaseouts.
2. Eliminate the standard deduction and personal and dependency exemptions as adjustments to regular taxable income in calculating the AMT.
3. Remove miscellaneous itemized deductions as an adjustment to regular income tax, so that middle-income taxpayers can deduct items such as employee business expenses for AMT purposes.
4. Eliminate the AMT medical expense adjustment, so that middle-income taxpayers can deduct the same amount of medical expenses for both regular tax and AMT purposes.
5. Remove state and local income and other taxes as an AMT adjustment.
6. Allow credits enacted to promote important public goals (e.g., the low-income credit, tuition credits, etc.) to be credited against AMT liability.
7. Exempt from the AMT all taxpayers with regular tax AGI of up to $100,000.
8. Create one AMT tax rate and set it below the third-lowest regular tax rate (currently, 25%).
9. Require the effect of the AMT on future tax legislation (i.e., whether the intended tax benefits of any change are negated by the AMT regime) to be reported with the revenue effect of proposed legislation.
10. Allow a minimum tax credit for all AMT, not just that attributable to deferral preferences, to place the individual AMT in parity with the corporate AMT.
11. Liberalize the capital-loss-limit rules when calculating AMT associated with incentive stock option (ISO) transactions (e.g., specifically allow a negative basis adjustment for ISO differences to be an ordinary, rather than a capital, loss).
12. Eliminate the definition of “qualified housing interest” and allow all deductible residence interest as a deduction for AMT purposes.
13. Exclude the AMT from the estimated tax penalty.
Repealing the individual AMT would eliminate all of its compliance and enforcement problems. However, if outright repeal is not possible, adjusting its effect by implementing one of the above-proposed solutions would at least return the AMT to its original purpose and relieve the disillusionment of the many taxpayers who do not see themselves as wealthy and believe they are being punished.