How Much Alternative Minimum Tax Do You Pay?

I've been reading and hearing a lot of talk about proposals to increase tax rates for the wealthy, that is, those with taxable income above $250,000.  I imagine there are some places in America where $250,000 of income qualifies you as wealthy, but the New York metropolitan area is definitely not one of those places.  In New Jersey we pay the highest state income tax, real estate tax, and sales tax in the country.  And the worst part is, that thanks to the alternative minimum tax, many of us do not even get any federal tax benefit from paying these taxes.  The alternative minumum tax ("AMT")is a separate computation, one that includes adjustments to your regular taxable income.  The adjustement that affects so many of our clients is the one that disallows the deduction for all state income taxes and real estate taxes.    If the tax computed using the AMT calculation is higher than the regular tax, the alternative minimum tax becomes your tax liability.

As I recall, the AMT was implemented as another way to tax "the rich", especially those who participated in tax shelters.  Although we haven't finished all of our 2010 tax returns, so far 138 of our clients have paid a total of $1,373,000 of alternative minimum tax.  These clients include a single working mother with $84,000 of adjusted gross income, and another individual with $59,000 of adjusted gross income. These examples are some of the many.  I don't think that anyone can argue that either one is "rich", or that the AMT was intended to apply to them.  After all, state income taxes and real estate taxes on a residence are far from qualifying as tax shelters.

However, there is a bright side to the AMT.  If regular income tax rates are increased, those of us who are subject to AMT will not pay any additional income taxes unless the alternative minimum tax rate is also increased, or the regular income tax rate increase causes your regular tax to exceed the AMT.  Many people pay so much AMT that a small increase in the regular tax rates will have no effect on their liability.

The alternative minimum tax is unfair to people who pay high state income and property taxes.  If Congress plans to make changes to our tax code that result in additional tax on individuals and families, I urge them to also change the AMT to eliminate state income taxes and property taxes as an add-back.  I believe that such a change will give AMT relief to most people who are currently subject to it.