The Trump administration's proposed repeal of the alternative minimum tax might remove some tax-planning headaches, but it isn't likely to reduce anybody's tax burden, according to tax-planning experts.
The AMT, which adds an extra layer of tax calculations for individuals earning more than $200,000 a year, has been put on the chopping block as part of President Donald J.
Trump's tax plan.
Even though the AMT is widely viewed as a tax on the uber-wealthy and requires taxpayers to pay the higher of two separate tax-bill calculations, it actually has the biggest impact on filers earning between $200,000 and $1 million, according to Megan Gorman, managing partner at Chequers Financial Management.
"If you're in that group, you're initial reaction should be great, but you need to keep in mind that (President Trump) also wants to get rid of big itemized deductions like state taxes and property taxes," she said. "So, if you're a taxpayer subject to AMT, to some degree, your life doesn't change much."
But if you're a financial adviser, the
removal of the AMT could still put a smile on your face.
"I hate anything that is so complicated you can't explain it in plain English to the clients," said Rose Swanger, president of Advise Finance, a $10 million advisory firm.
"I welcome a simpler and cleaner tax code," she added. "Getting rid of the AMT will be a first step."
Leon LaBrecque, managing partner and CEO at LJPR Financial Advisors, is also not a fan of the AMT, which he prefers to call the "mandatory maximum tax."
He manages nearly $700 million in client assets.
"It catches mostly taxpayers in the $200,000 to $500,000 range, but I have definitely seen it hit a lower income," he said. "My bigger-income folks usually don't pay AMT, since their tax bracket goes over the 28% AMT rate. "
Congress enacted the AMT in 1979, after learning that in 1966 there were 155 taxpayers with incomes above $200,000 that used deductions and other loopholes to avoid paying any federal income taxes.
By the late 1990s, the AMT was affecting about a million taxpayers a year, and currently affects
about 4.5 million taxpayers.
Ms. Gorman said about 31% of those earning between $200,000 and $500,000 are now subject to the AMT. And the tax hits about 60% of those earning between $500,000 and $1 million.
"It typically hits people in high-tax states where there are significant property taxes," she said.
According to some estimates, the repeal of the AMT, without factoring in the loss of major deductions, will reduce tax revenues by $35 billion.
Not only was the AMT never indexed to inflation, but it also was not designed to target a specific slice of what are now considered upper-middle-income earners in some high-tax states like New York, New Jersey, and California.
"It really affects a limited number of people, and mostly those with incomes of between $200,000 and $500,000," Steven Rosenthal, senior fellow at the Urban-Brookings Tax Policy Center.
"Because Congress did not inflation-adjust the tax brackets, over the years the AMT has hit a wider and lower range of taxpayers," he said.
Regarding
published reports of President Trump's $31 million AMT payment in 2005, Mr. Rosenthal attributed that to a $109 million net operating loss that was carried forward from prior years.
"That was a very strange and very rare situation that you would almost never see," Mr. Rosenthal said.
According to Ms. Gorman of Chequers Financial Management, the AMT does not allow deductions for state and property taxes, and the tax rate starts at 26%, then quickly climbs to the 28% bracket.
The non-AMT calculation factors in income minus deductions, with the rate starting at 10% and potentially climbing to 39.6%.
"Even though the AMT looks like a lower tax bracket, you're having more of your income taxed at a higher rate sooner," she said.
Paul Schatz, who manages $90 million as president of Heritage Capital Management, said the AMT goes against many of his fiscally conservative beliefs, but he doesn't think it should be repealed without a way to replace the tax revenue.
"The intent of the AMT was very sound, but it's application is sorely lacking," he said. "Fix the problem by making it current and indexing it to inflation, because people making seven figures a year should not be able to deduct away their fair share to zero. Wow, I sound like a Democrat."
