Another Boomer Is Stung by the Alternative Minimum Tax

New York Times, March 23, 2003

I was feeling pretty good. After spending many hours over several days doing my taxes with a software program, I had found my reward: the number in the upper right hand corner of the screen said I was due a refund of $6,000.

So far, so good. Then the program notified me that, according to its calculations, I might be subject to the alternative minimum tax. No problem, I thought. This rather obscure tax was passed by Congress in 1969 to catch some of the rich people who were using deductions to avoid paying income taxes. Salaried guys like me, I assumed, had nothing to worry about.

But the computer told me that, yes, I qualified for the tax — and that my A.M.T. was $3,000 more than I would have paid under the usual system. No “sorry,” no “better luck next time,” no consoling hug. With a few keystrokes, my refund was cut in half.

I thought that the computer had made a mistake, but Stuart Kessler of Goldstein Golub Kessler, an accounting firm in Manhattan, said nothing was amiss. He said that more and more middle-class people are being hit with the tax — and are often just as surprised about it as I was.

“People are just blown away when they see the additional taxes that are due because of the A.M.T,” he said. “When we tell them they are subject to the A.M.T., their first question is, `How can we get out of it?’ “

The Treasury Department says that about three million people are now affected by the tax, double the number from 2000. And several studies have found that by 2010, a quarter of all taxpayers, about 36 million, will be subject to the tax if the law isn’t changed.

The minimum tax runs parallel to the regular income tax; people pay whichever is higher. Under the minimum tax, many deductions are denied, including those for children, the taxpayers themselves and for property taxes and state and local income taxes.

In other words, the tax is literally hitting baby boomers where they live — as they are buying homes and raising their children. Taking many common deductions can push families into the minimum tax.

“More and more boomers are affected by the A.M.T. because their income has risen and their deductions have risen,” Mr. Kessler said. “All of a sudden, they find that they can’t take those deductions for alternative-minimum-tax purposes.”

I looked at my own return. On my list of deductions, I had all the usual ones, though apparently too many: I had four exemptions for my children. I had paid property taxes, but on two homes — my primary residence and a vacation home. I didn’t think the amount of state income tax I paid was out of the ordinary, but I did pay it in two states: Connecticut and New York.

Joyce L. Franklin, an accountant and certified financial planner at JLFranklin Wealth Planning in Larkspur, Calif., said that a couple who are her clients, but did not want to be interviewed, had been hit with the minimum tax because they paid a large amount of state income and property taxes after exercising stock options and buying a home. So the federal taxes for the couple, who are in their late 30′s, went from $17,000 to more than $30,000. “How could that be?” they asked her.

“The A.M.T. is an add-back system,” she said. “The items that you would think you’re getting a benefit from are added back because of the evil A.M.T.”

Ms. Franklin said she expected more people to be pushed into the minimum tax because many people had been putting their money into first or second homes instead of the declining stock market. And property taxes can help set off the A.M.T.

There isn’t much that taxpayers can do to avoid the tax, Mr. Kessler said. If they have an indication that they will be subject to it, they can pay their property taxes in January instead of December, pushing that deduction into the new tax year. Of course, that works only if the taxpayers won’t be subject to the minimum tax in the new year.

Mr. Kessler also offered an interesting tip on state tax refunds. If, say, a taxpayer is subject to the minimum tax this year but is also due a refund on state income taxes, he won’t have to pay federal income tax on that refund next year. That is because the A.M.T. didn’t allow him to deduct those state taxes this year. I like accountants who can find the silver lining.

In some cases, Ms. Franklin said, a higher income helps to avoid the tax. Taking a bonus in December rather than January may help, she said. But both she and Mr. Kessler said taxpayers should talk to their accountants before moving income from one year to another because avoiding one tax may just move you into another tax bracket. “It’s a moving machine, this A.M.T.,” Ms. Franklin said. “If one thing changes, it can affect other areas. So you have to be careful.”

She said life had changed for that couple who were subject to the A.M.T. This month, they had twins, giving them three children and maybe, just maybe, two more personal exemptions. It’s too early to tell if that will prompt the A.M.T. again this year.

By their twins’ first birthdays Mom and Dad should know for sure.