02/ 02/ 2007
While fighting the alternative minimum tax in Washington, D.C., NFIB explains what this unfair provision means to your bottom line
Just a few hundred people. That's all it took to spark one of the most confusing and unfair taxes in our nation's complex set of codes. Even though it was originally designed to affect only the very wealthy, the alternative minimum tax has now begun to reach more and more taxpayers every year—and soon its impact will be anything but minimum.
Most small-business owners file taxes as individuals, which is why NFIB is so involved in the current AMT debate in Washington, D.C. If changes to the tax code are not made, the AMT will have an enormous impact on millions of small-business owners across the country in coming years.
Background: Forty years ago, Congress noticed a few hundred of the country's wealthiest citizens were finding ways to avoid paying their fair share of taxes by taking advantage of exclusions, deductions and credits. In order to make sure everyone paid at least a reasonable amount, lawmakers enacted what is today known as the AMT.
Simply put, this complex provision requires taxpayers to calculate their taxes twice, and then pay the higher amount. For many individuals, the AMT squelches any tax breaks they might be eligible for. And more than anything, the tax has crept down to hardworking, middle-class Americans—far from the wealthy elite it was originally designed to keep in check.
One reason for the tax's growing reach is because it's not indexed to inflation. The personal exemption, standard deduction and rate brackets under the regular tax are indexed, so tax rates don't rise when income keeps pace with inflation. Not so for the AMT. The Congressional Budget Office estimates that 70 percent of taxpayers in 2050 would be affected by the AMT as it currently stands.
What makes the problem so difficult to fix? The government doesn't like to get rid of lucrative taxes, and some estimates indicate repealing the AMT could cost as much as $1.4 trillion from 2007 through 2016.
Does the AMT affect me? Calculating the AMT is no small feat. That's why 75 percent of taxpayers affected by the AMT hire professionals to prepare their returns, according to a report from the President's Advisory Panel on Tax Reform.
In 1982, when today's version of the AMT was first enacted, the income exemption was $40,000 for married couples. Even if the AMT was indexed to inflation, the exemption today would be just $82,000 for married couples. Legislation enacted in recent years has increased the 2006 exemption—but not by much. To be exempt from the AMT for 2006 returns, your taxable income must be $62,550 or less, if you're married and file jointly.
"Small-business owners are already overburdened by the complex tax code," says Dan Danner, NFIB executive vice president. "The AMT forces millions of taxpayers to fill out a 12-line worksheet, read eight pages of instructions and complete a 55-line form to determine whether they must pay this unfair tax."
NFIB works to find a permanent solution: As a temporary solution to the problem, lawmakers have passed a "patch" to the AMT so that it won't continue to creep to the middle class. That patch expired at the end of 2006, and unless Congress acts, millions more Americans will be subject to the AMT on their 2007 returns. Many will pay an average of $2,770 more in taxes, according to the President's Advisory Panel report.
NFIB knows that a patch won't fix this gaping hole in the U.S. tax code. Right now, NFIB is supporting a permanent solution to fix the AMT crisis, but we'll be surveying members over the next few months to see what they think about different ways to address this problem. The AMT is expected to top Congress' agenda this spring, and NFIB will be there to strongly urge lawmakers to address the importance of this issue.
Sitting Targets
You may get hit with AMT liability if you have:
- High state and local taxes, including income, property, personal property and sales taxes
- A large family
- A large amount of deductible medical expenses
- Exercised incentive stock options
- A large number of personal exemptions
- A large amount of miscellaneous itemized deductions
- A large amount of capital gains
- Investments in a tax shelter
NFIB.com
Find even more details on the AMT, including step-by-step details on how to calculate your exposure, in "Alternative Minimum Tax Repeal" in the "Tax Relief" section of www.NFIB.com/issues
Member Benefit
NFIB has prepared a members-only guide on how to deal with the AMT. Call (800) NFIB-NOW to request your copy of Understanding the AMT and How to Minimize Exposure.
