Thanks to the fiscal cliff deal, the alternative minimum tax will not ensnare tens of millions of middle-class Americans for whom it was never intended. The deal raised the income thresholds before the A.M.T. kicks in and indexes them for inflation going forward. As a practical matter, this means that 28 million filers who would have had to pay the tax on their 2012 returns have been spared and are much less likely to have to pay the tax in the future.
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Yet the fixes are incomplete. The purpose of the A.M.T. is to ensure that wealthy taxpayers cannot make excessive use of deductions, shelters and other tax breaks. It was supposed to hit multimillionaires and billionaires whose tax shelters reduce their tax bills to a pittance relative to their incomes. In the absence of comprehensive reform, the A.M.T. will continue, for the most part, to allow the highest-end taxpayers to escape, while still afflicting many taxpayers below those lofty levels.
In 2011, for instance, more than half of taxpayers in the $200,000 to $500,000 income range paid the A.M.T, compared with only one-third of taxpayers who made more than $1 million, according to the Tax Policy Center. The situation will be much the same for 2012 and beyond unless Congress acts to rectify it.
The main problem lies in what counts as an excessive tax break. Common write-offs for dependents and for state and local taxes are counted as shelters subject to taxation under the A.M.T. Most A.M.T. payers are couples with children in the high-tax states of New York, New Jersey, Connecticut and California.
Tax breaks for dividends and capital gains, however, are not counted as shelters subject to the A.M.T. As a result, the wealthiest Americans — who reap the lion's share of such investment income while enjoying the low tax rates that go with them — are less likely than not-so-wealthy filers to fall into the A.M.T. Income-tax rates on capital gains and dividends top out at 20 percent, compared with a top rate of 39.6 percent on salary and wages. The saving to investors is roughly $90 billion a year. The upshot is that a professional couple with three children in New York City earning $250,000 is more likely to pay the A.M.T. than someone with no dependents in Florida who makes millions a year from a tax-favored stock portfolio.
It wasn't always that way. For many years after the inception of the A.M.T. in 1969, tax breaks for capital gains were included in the A.M.T. and, accordingly, most A.M.T. payers were filers who had large capital gains. But starting in the 1990s, Congress no longer required investors to report such tax breaks under the A.M.T. The omission was not an oversight. It was a deliberate policy to cut taxes for the rich that has endured to this day.
The inflation adjustments in the fiscal cliff deal were a fairly easy fix because they shielded a broad swath of taxpayers. A truer test of Congress's resolve will be its willingness to reduce the impact of everyday deductions, while adding capital gains and dividends to the system — further helping taxpayers for whom the A.M.T. was not intended while capturing those for whom it was.
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