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AICPA Asks Congress
to Repeal the AMT
On
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
http://tax.aicpa.org/Resources/Tax+Advocacy+for+Members/
IRS+Regulation+and+Administration/AICPA+Submits
+Tax+Gap+Testimony+to+House+Ways+and+Means+Committee
+-+March+20+2007.htm.)
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.
Solutions
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.
Conclusion
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. |
