On March 22, the House Ways and Means Subcommittee on Select Revenue Measures held a hearing on the impact of the alternative minimum tax (AMT) on families. The AMT was enacted in 1969 to ensure that high-income tax payers did not avoid all income tax liability by taking a large number of income tax deductions. The AMT disallows many common income tax deductions, including those for mortgage interest, educational credits, and dependent children. A growing number of moderate income families are subject to the AMT as it is not indexed for inflation.
Chair Richard Neal (D-MA) said, “We’ve all seen those commercials where the parents tell the kids that this year, they’ll finally get to go to Disneyland. Well, imagine the follow-up conversation where the parents deliver the bad news that the AMT took away their trip to see Mickey. This is real life. These are the real economic consequences for middle-class working families who are told they owe more in taxes than they previously thought.”
“I’ve been an opponent of the AMT going back to my earliest days in Congress,” said Ranking Member Phil English (R-PA). The AMT not only affects families but it also affects “the most effective job creators in the country: small businesses,” he said. Rep. English said that the AMT must be fixed so that it no longer negatively impacts families but that any fix must not be at the expense of small business owners.
“Throughout the year, I am in the habit of projecting my income tax liability, to ensure that we get a substantial refund,” said Maggie Rauch, a certified public accountant (CPA). She continued, “With three young children, savings is often impossible. We use our tax refund as our ‘forced’ savings plan. The refunds usually go for our extras a new computer or our vacation to Disneyworld. In February, I projected our refund for 2007 and was dumbfounded when I saw that we were going to be in AMT.” Ms. Rauch said that her family could not have planned to avoid the AMT given that they take very few deductions only the standard deduction for each family member. She told the subcommittee that her family does not own a home, stocks, or other assets but that just by taking the deductions allowable under current tax law, her family’s tax bracket “will go from 15 percent to 26 percent.”
David A. Lifson, president-elect of the New York State Society of Certified Public Accountants, said, “The AMT is in substance, predominately a secret tax on the portion of our income paid over as taxes to state and local governments to provide community services, such as schools, public safety and low income household support. To a lesser extent, it also quietly takes back tax savings from family tax relief mechanisms and benefits built into the regular tax system, and deductions that might be otherwise allowed relating to the production of gross income.” Mr. Lifson offered five examples of very different families with one common feature: each was subject to the AMT. He noted that all of the families “were compiled from hundreds of similar examples for the 2006 income tax year to illustrate how the AMT is affecting average Americans who pay income tax.” He concluded his remarks by advocating a repeal of the AMT; he said that if repeal was not possible “then major reform to the AMT is needed. Increasing and indexing the AMT exemption amounts to a figure much larger than today would remove more Americans from this needlessly complex burden.”
Joel Campbell, a taxpayer living in Northern Virginia, described how the increasing value of his home made his family subject to the AMT: “The increasing real estate tax plus the amounts paid for the state income tax and the local personal property tax, none of which are deductible for the alternative minimum tax, is the cause of my being subject to the AMT. This is of course on top of the loss of middle class deductions for things like college tuition payments.” He continued, “With the average citizen attempting to fund education for their children, retirement for themselves and provide health care for the family, all of which are increasing faster than income or inflation, any loss of disposable income is a cause for concern. The desire of all working persons is to increase their earnings; however, the AMT seems to be a disincentive to having increased earnings. As earnings increase, so do state and local income taxes. Additionally, there is the tendency to move to a larger home and thus increase real property tax and all this increases the chances of being hit by the AMT.”
Additional witnesses included: Michael K. Day, Sr., president of Baltimore County Professional Fire Fighters Association; Jon A. Nixon, a partner at Katzman Weinstein and Co.; and Joseph W. Walloch, on behalf of the American Institute of Certified Public Accountants.
