It wasn't intentional. The AMT was established in 1969 to force around 155 millionaires who were using tax shelters and massive deductions to avoid all federal income tax to pay their fair share. Over the years the AMT has strayed far from its original purpose of punishing a few rich tax dodgers. It has gradually become a huge cash generator for the federal budget. The Treasury projects that the AMT will raise $88 billion in 2008, and that number is expected to double by 2013. In fact, it's now far too big to repeal without disastrously ballooning the budget deficit.
The AMT doesn't simply eliminate the plutocratic tax shelters that the rich were using in the 1960s. It erases most of the routine deductions that reduce taxes for middle-class households. For the 2008 tax year, around 4.1 million households are expected to pay the AMT, according to the Tax Policy Center, double the number in 2002. Well over half of those payers will be HENRYs. Of families with children and with incomes ranging from $200,000 to $500,000, more than 50% will pay the AMT.
The AMT traps large numbers of HENRYs in high local- and state-tax states like New York, Massachusetts, California, and Minnesota. The immense rise in property taxes across America, a legacy of the housing bubble, isn't just hitting HENRYs when they write checks to their towns. Once the AMT applies to them, they can't deduct the local levies on their federal tax returns. Last year John Selden's property taxes on his $750,000 house in the Charlotte suburbs jumped from $9,000 to $12,000. A few years ago, before he was hit by the AMT, Selden saved around 30% on his property taxes because he could deduct them on his federal return. Last year the AMT forced him to effectively pay 100% of those taxes, including the $3,000 increase. Gary Seim, an engineer at Boston Scientific, and his wife, Lee Pfannmuller, a natural-resource manager for the state of Minnesota, pay around $10,000 in property taxes on their modest 2,500-square-foot house in Minneapolis. That's twice the figure of five years ago. In effect, they're paying an extra $3,000, courtesy of the AMT. In an Obama administration, at least some of the HENRYs would pay higher taxes because of his plan to raise the two top marginal tax rates - for the highest, from 35% to 39.6%, back to where they stood before the Bush tax cuts. HENRYs who pay slightly more under the AMT than in the regular system would be tipped back into the regular system by the Obama plan, saddling them with higher taxes.
On the other hand, the McCain plan is pro-HENRY in pledging to leave the top tax rates where they are today. Hence, HENRYs already paying the AMT would stay there unless their incomes soared. (But his plan would do nothing to help HENRYs already trapped by the AMT, nor those that will fall under the AMT in the future.) McCain also favors HENRYs on capital gains: He'd leave the current 15% maximum rate in place. Obama's plan is aimed right at the heart of the HENRYs: He'd lift the rate to at least 20% for families earning over $250,000.
Between the high taxes and expenses for the kids, the HENRYs are hard-pressed to build the large savings they'll need for an affluent retirement. In fact, their only real chance of becoming "wealthy" - of accumulating around $3 million in today's dollars when they retire in 20 or 30 years - is to set aside a big chunk of their income each year, usually between $40,000 and $60,000.
Most of all, the HENRYs face daunting choices. "They can become wealthy, but they must starve themselves of luxuries to get there," says advisor Tysk. "These people save only because they go without." Tysk advises his clients to save 15% of their income for retirement, and believes that most of them do it - forgoing an extravagant lifestyle. Adds Barry Glassman, a financial planner at Cassaday & Co. in McLean, Va.: "For high earners, it's all about discipline now or regret later."
Most HENRYs view achieving a comfortable retirement as a long and difficult climb. Selden says his family has just $200,000 in savings outside of the college fund. "With how well we're doing, I thought I'd have $1 million by now," says Selden. He has watched his retirement and college savings accounts shrink by 25% since last year. Selden reckons he'll save another 5% of his salary and postpone pet projects like an expansion of the playroom. "I have a lot of time" till retirement, he says, "but that doesn't make me feel any better when I see my quarterly statements." Tom Hume, 39, a real estate broker from Tacoma who made $275,000 last year, pays so much to put three kids through private school that he's looking at an extremely modest retirement. At the end of each year Hume tries to put $10,000 into his 401(k), but some years he can't even save that much. "No one is going to feel sorry for me," says Hume, "but as we get closer to retirement, we see that the amount we can save just won't make it. There's no extra money in our lives."
Kelly Lynch, the maintenance-company owner, has license plates that read "Dreeamr," from a nickname her parents gave her in high school. The dream still lives for the HENRYs, but it's elusive. It's a dream that enriches us all, and that America would do well to nurture.