House Democrats eyeing reduction in the AMT

WASHINGTON — House Democrats are hoping to appeal to the middle class with a plan to shift to wealthy taxpayers the responsibility for paying the alternative minimum tax, but financial advisers in general think that it is a bad idea.
“Anytime that you tinker with the tax system, there are going to be consequences,” said Rob Moody, president of Compass Advisors LLC in Big Canoe, Ga. “If you raise the tax rate to 90%, I think you’d find the major majority of people would spend their time in leisure rather than working, because it would not make sense to work.”
House Ways and Means Committee Democrats are considering legislation that would eliminate the AMT burden on taxpayers earning less than $250,000 a year, lower AMT taxes on those earning between $250,000 and $500,000, and substantially increase taxes on those earning more than $500,000, according to published reports.
House Budget Committee member Scott Garrett, R-N.J., confirmed that such a plan is being discussed. Yet eliminating the AMT, which Republicans also have said that they want to do, would create an $800 billion to $1 trillion 10-year loss of tax revenue to the government.
“I find it hard to believe they can make up that much of a difference by raising taxes on the truly upper income,” said Mr. Garrett, who has introduced a bill that would index the AMT for inflation.
“We need to stop looking at other tax increases to pay for this, and start looking for spending decreases,” he said.
‘Still in flux’
The AMT was enacted in the late 1960s, when it was reported that some of the wealthiest people paid no income taxes, due to deductions they were legally entitled to take. It was never indexed for inflation, so it increasingly is hitting middle-income families, though Congress has postponed the impact in recent years by passing one-year “fixes.”
An aide to majority members of the Ways and Means Committee, who spoke on the condition of anonymity, said: “There is a general consensus on a plan among the House Ways and Means Democrats.”
The aide declined to comment on specifics of the proposal, saying that it is “still in flux.”
“It would be fair to say the plan we anticipate putting forward will eliminate or reduce the alternative minimum tax for most middle-income earners, the teachers and firefighters and police officers who were never intended to be hit by this tax,” the aide said.
The Ways and Means Committee is likely to hold hearings on the AMT in the near future, the aide said.
Democrats are hoping to have a bill on which to vote in the full House by early June or next fall.
The AMT has bedeviled many financial advisers, who increasingly are finding that their middle-income taxpayers are subject to the separate tax system.
In addition to requiring more time and effort computing the tax, some advisers say, the AMT is having unintended consequences on their clients.
Roger Kruse, a principal with FFP Wealth Management in Coon Rapids, Minn., said that one of his clients has nine children and earns about $180,000 in income. The client likely will pay an estimated $13,000 in federal taxes in 2007 under the AMT system, Mr. Kruse said.
While many advisers don’t agree with the Democrats’ plans to tax the rich more heavily, some think that the idea makes sense.
“It will certainly take the AMT back into what it was originally designed to be — a device to limit the absolute highest income earners from being able to avoid tax through excessive deductions,” said Gary Schatsky, president of the ObjectiveAdvice Group in New York.
“You’re going to see a lot of push-back,” he said. “But politically, it certainly should be a winner. This is welcome news for the middle class and for anyone who believes the AMT at its inception had a basis in the tax code, which I think most believe.”
Times have changed
That may be the case, but many of the deductions that were available to the wealthy when the AMT was enacted are no longer available today, many advisers argue.
“We had a million write-offs in the tax code when that was implemented,” said Charles Stanley, a wealth manager with Capital Financial Advisors LLC in La Jolla, Calif.
Now it is “virtually impossible” to escape income taxes, said Mr. Stanley, who thinks that the AMT should be eliminated altogether.