How families making $75,000 can get hit with AMT

A House subcommittee hears from middle-class taxpayers and tax practitioners about why the average family may be subject to the AMT.

By Jeanne Sahadi, CNNMoney.com senior writer

NEW YORK (CNNMoney.com) -- Mr. and Mrs. Middle Class went to Washington last week and delivered a direct message to lawmakers: Kindly get on the stick about the Alternative Minimum Tax (AMT). We don't feel like being punished because you guys keep punting the problem.

The problem is how to prevent the "wealth" tax from hitting upwards of 30 million mostly middle-class taxpayers by 2010 - and how to deal with the cost of AMT reform, which could reduce federal revenue by between $500 billion and $1 trillion over 10 years.

Firefighter Michael Day, a married father of three living in Cockeysville, Md., told lawmakers at the House Ways and Means subcommittee hearing last week that the AMT is an "un-American tax" that threatens to punish those who are "honoring American values of family and hard work. ... Firefighters don't have Swiss bank accounts to avoid paying their taxes."

The AMT, designed to prevent the very wealthy from sheltering all of their money from taxes, "is broken and we're asking you to fix it," Day told lawmakers.

The AMT threatens so many people for a few reasons:

  • The amount of income taxpayers may exempt from consideration under AMT has not kept pace with inflation - even though the average paycheck has.
  • The AMT disallows many tax breaks that the middle class enjoys under the regular code, such as personal exemptions for dependent children, property taxes, and state and local income taxes.
  • The tax cuts of 2001 and 2003, including lower income tax rates, marriage penalty relief and expanded credits, reduce one's tax liability under the regular code, but no such changes were made to the AMT, so there's a greater chance your liability under the AMT will be higher. If it is, then you must pay the additional amount owed or take the lesser refund.

Maggie Rauh is a married mother of three and a CPA in Springfield, Mass. Her household income is $75,000, she doesn't own a home, and she takes the standard deduction. Rauh told the subcommittee that unless lawmakers increase the AMT exemption levels, she expects she will fall under the AMT and that it will reduce her family's refund by $1,300 in 2007.

The biggest culprit: she will lose the five personal exemptions she takes under the regular code (three for her kids and two for her and her spouse) since they are disallowed under the AMT.

Shy of ditching her kids, "there is no planning to be done to avoid the AMT," Rauh said.

Rauh's family is not alone. The Tax Policy Center estimates that by 2010, 89 percent of married couples with two or more kids and adjusted gross incomes (AGI) between $75,000 and $100,000 will be subject to the AMT. In 2006, only 1 percent of families in this group were subject to the AMT. Those who live in high-tax areas are the most vulnerable.

Joel Campbell of McLean, Va., who is married with two kids, told lawmakers he has paid the AMT for the past four years already, forking over about $1,000 more each year than he would otherwise owe under the regular tax code. The biggest culprit, he said: His property taxes and state and local income taxes have gone up, and neither are deductible under the AMT.

"With the average citizen attempting to fund education for their children, retirement for themselves and provide healthcare for the family ... any loss of disposable income is a cause for concern," Campbell said.

Joseph W. Walloch, a CPA representing the American Institute of Certified Public Accountants, told lawmakers of the Klaassens, a Kansas couple with 10 kids and an adjusted gross income of $83,000. In the past decade, he said, they have shelled out more than $25,000 because of their added AMT liability. That's because the AMT disallows their 12 personal exemptions, their state and local income tax deduction and some of the medical expenses, including for their son's cancer care, since a higher threshold must be met under AMT to qualify for medical deductions than there is under the regular code.

Walloch also spoke of Aaron Law who had an AGI of $62,000 and would have gotten a refund under the regular code because he had many miscellaneous deductions from job-related expenses. But because miscellaneous deductions are disallowed under the AMT, he ended up owing $7,267.

Jon A. Nixon, a CPA from New York, told lawmakers that the AMT is robbing small business owners of tax incentives to expand their businesses because it disallows a number of business credits and deductions, including the research and development credit, the work opportunity credit for hiring disadvantaged people, the tip credit (for taxes paid on employees' tips) and the accelerated depreciation deduction for the purchase of business equipment.

One small business owner Nixon knows wants to expand the small restaurant that he runs with his wife and kids. He employs 10 people, half of whom entitle him under the regular code to take the work opportunity credit . But the AMT disallows that credit and also limits his accelerated depreciation deductions.

"[His] case shows how Congress gives benefits on one hand and takes them away with another," Nixon said.

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.