How the Alternative Minimum Tax Got Out of Control

Alternative Minimun   April 30, 2013   Comments Off on How the Alternative Minimum Tax Got Out of Control

Back in the old days (the 1970s) when disco first hit the clubs and Jimmy Carter was President, our government tried to even things out for American taxpayers, financially.  It had been occurring to people that the very rich amongst us were paying very little in the way of income taxes.  The rest of us were paying quite a bit.

The IRS Plays Robin Hood, Sort Of

So our government created the Alternative Minimum Tax (AMT).  This was designed to make those rich folks pay more income tax.  More about the AMT here.   It stripped away many of their lovely deductions, which is how they were managing to pay so very little in federal income taxes.  It’s the IRS playing Robin Hood, who took from the rich and gave to the poor.

Of course one could argue that the second part of that phrase may or may not happen…is the IRS giving that extra tax money to the poor?  Probably not, but if you think of many tax credits available to the poor then yes, the IRS is truly playing Robin Hood.  Take from the rich with the AMT and give to the poo with the Earned Income Tax Credit (EITC).  The EITC allows very low income earners a tax break on a major chunk of their income, so as to encourage work.  Otherwise people might just stay unemployed since taxes would take out so much of their paychecks.

The Problem With the Alternative Minimum Tax

Anyway, back to the Alternative Minimum Tax.  Actually we’re going to need to talk about IRS tax brackets for a minute, too.  There’s a problem with the Alternative Minimum Tax, which is that more and more American taxpayers are caught in its web.  A much larger percentage of the taxpaying population is now subject to the AMT…whoppingly large, actually.  Some people who end up owing the AMT aren’t even that rich.  What happened?  Inflation.

That’s why we need to take a look at tax brackets, which aren’t affected by inflation.  Every year, things cost a little bit more.  Every year, salaries creep up to keep up with how much more things are costing.  Ever hear an elderly person say something like

“Back in my day,  a loaf of bread cost fifteen cents!”

Well yes, it probably did, but he was also making something like $5000 a year, too!  That’s inflation…things go up in price.  Well if we didn’t also adjust the IRS tax brackets for inflation, there would be hardly anyone at all paying taxes at the lowest tax brackets only.  Everyone would be paying the top rate…39%.  So we have to adjust the brackets every year.

But the wise folks who designed the Alternative Minimum Tax didn’t do it correctly: the thing is not adjusted for inflation!  So what was considered a phenomenally rich person in 1970, making $75,000, is now considered solid middle class today.  But that person is going to get whammed with the AMT because the AMT still thinks like it’s in 1970.

Bringing the Alternative Minimum Tax Into Today’s World

So starting in 2013, the Alternative Minimum Tax is adjusted for inflation.  Nice!  Fewer people will be considered so rich they have to pay this alternative tax.  $75,000 will no longer be considered absurdly rich.