Capital Corner:  “ART” - The “Alternative Regular Tax”

Jim Brandenburg, CPA, MST Tax Shareholder   email | bio
August 2010

This column is not about the celebrated Milwaukee Art Museum or the local art fairs across the state this time of year.  It is about art of a different form, the politics of tax legislation in Washington. 

As you may recall from earlier issues, Congress is still looking to extend several popular tax provisions this year that expired at the end of 2009.  A few of the items being debated include the R&D tax credit for businesses and the sales tax deduction and the IRA charitable distribution of up to $100,000 for individuals.  Absent from the debate has been an extension of the Alternative Minimum Tax (AMT) exemption for individual taxpayers.  For the 2009 tax year, the AMT exemption for married couples was $70,950 and $46,700 for individual taxpayers.  In each of the past several years, Congress has enacted changes to the AMT exemption in an attempt to maintain roughly the same number of AMT taxpayers.  While this patchwork approach has worked to some degree, the number of taxpayers subject to AMT has continued to rise.   

AMT was first introduced to taxpayers over 40 years ago.  It was initially designed to capture certain high-end taxpayers who paid little, if any, income tax due to various deductions and credits.  The federal income tax structure when AMT was introduced essentially consisted of calculating tax twice, first under the regular tax format and secondly under the AMT format, and paying the higher of the two calculations.  The objective was to make sure all taxpayers paid at least some level of tax.  In its infancy, the AMT did as it was intended and resulted in some taxpayers paying federal tax via the AMT.  But, over the years as the rest of the tax code changed, little was done with AMT.  Even as regular tax rates were cut in the early 2000s, nothing was done with the AMT tax rate.  Further, AMT was not indexed for inflation as was the regular tax.  The AMT has disallowed the common deductions for state income and property taxes as well as exemptions for dependents.  These factors have led to a significant rise in the number of taxpayers paying AMT over the past decade, from around one million in 2000 to more than 10 million now. 

This all leads us to 2010. As indicated above, the AMT exemption was $70,950 in 2009 for married couples and $46,700 for individual taxpayers.  Unless Congress acts, the AMT exemption will fall to $45,000 in 2010 for married couples and $33,750 for individual taxpayers.  This significant drop in the AMT exemption for 2010 could nearly double the number of taxpayers subject to AMT.  In addition, those already paying AMT would see their AMT liability rise.  The income level where married couples would need to start being concerned about AMT would fall to $100,000 or lower.  With more and more taxpayers paying AMT, fewer and fewer will be falling into the regular tax system.  Perhaps the regular system will become the new alternative; yes, it could someday be the "Alternative Regular Tax" ("ART"). 

With this being an important election year, it will be interesting to see how Congress frames AMT since little has been mentioned thus far.  Will Congress leave AMT alone in 2010, or are they lying in the weeds waiting for the right time to "rescue" taxpayers?  Combine these AMT issues with other scheduled increases in 2011 (regular income tax rates, capital gains rates and dividends rates), and Congress has much more artwork to finish.