Alternative minimum tax = maximum headache

Marketplace Staff Mar 2, 2007

This is Marketplace Money from American Public Media. I’m Tess Vigeland. So there you are sweating your way through this year’s 1040 form, and then you encounter line 45, all it says is alternative minimum tax, with directions that point you to a whole new mess of calculations. Oh, geez. Marketplace’s Bob Moon tells us, at that point for a growing number of taxpayers, the nightmare is just beginning.

In some ways, this story reads like one of those horror flicks out of the 1950s. But to paraphrase an old saying, just because you’re paranoid doesn’t mean the taxman isn’t out to get you.

Help, wait, stop and listen to me. You fools, you’re in danger. Can’t you see, they’re after you. They’re after all of us. They’re here already. You’re next.

More and more American taxpayers are finding themselves suddenly trapped in a diabolical hex. Like it or not, they suddenly become wealthy at least in the eyes of the Internal Revenue Service. Kay Belle is tax editor for

I have a neighbor across the street, they had some real estate dealings and it threw them into the AMT this year. And she was apoplectic. And she’s like, why didn’t I hear about this? How long has this been going on? And when you tell people, it’s been going on for almost 40 years, they’re a little taken aback. Until we bump up against it, we don’t realize how costly it can be.

It’s . . . in this case is the AMT, the alternative minimum tax. It started out with the best of intentions.

Congress, back in 1969, decided they wanted to make sure that everyone even the wealthy paid their fair share, so they created the alternative minimum tax to catch these people who are utilizing tax loopholes.

At first, it only affected a select few, but now, it’s become essentially a shadow tax, raising billions of dollars and additional taxes that made Congress reluctant to kill this monster even as it creeps even lower on the income scale maybe toward you.

Every year when we see that the tax brackets are bumped up a little for inflation, that doesn’t happen automatically with the alternative minimum tax. And that means every time, over the last 40 years, that people have gotten raises, their income has been pushing them towards what the AMT considers wealthy for its purposes.

It could be worse. It wasn’t until late last year that lawmakers came through again with a last minute fix, raising the exemption to prevent tens of millions of taxpayers from being caught by the creeping AMT on this year’s return. But for the current 2007 tax year, around 24 million taxpayers will be on the hook at least as it stands right now for having to pay thousands more than they might be expecting. Professor Michael Graetz is a tax law expert at Yale University.

Most people had never had to deal with the fact that there was this AMT and therefore, they felt like they could be rather confident in setting their with holding and so forth, to know that they were pretty current in their taxes and so it does make planning harder.

Typical tax planning calls for increasing your deductions, but many such as state income tax and property tax deductions don’t apply if you’re caught by the AMT. Ohio State University Professor William Raabe says under the AMT, you’ll have to give back even basic tax breaks.

There’s an energy credit that gives you back money off the top for putting in new windows or insulation or solar panels. Well, not if you’re an AMT taxpayer, it doesn’t, because those credits don’t apply.

And that can call for planning ahead. Greg Rosica is contributing editor for the Ernst & Young Tax Guide. He says asking questions in advance might help borderline taxpayers avoid the AMT such as…

Does it make sense to pay the property taxes in the current calendar year or perhaps wait ’til the following calendar year because most property taxes are payable over a four or five-month period with different discounts, and so you do have flexibility as to when you pay them which calendar year. Many people just jump at the early discount and pay them earlier. But by doing so may actually put themselves into alternative minimum tax.

There’s one more hidden cost involved with this shadow tax. Yale Professor Michael Graetz says most Americans end up paying somebody else or buying software to do their taxes just to figure out if they have to pay more or don’t.

It’s bad enough to put the American people through the pain of having to calculate their taxes once. But to put them through the pain of having to do it twice seems cruel and unusual punishment to me.

Finally, Democrats in Congress are vowing to come up with an answer to the growing shouts of the tormented.

Will you tell these fools I’m not crazy. Make them listen to me before it’s too late.

I will listen to you.

But after years of no serious change, Ohio State Professor William Raabe is skeptical.

I don’t think there’s a conspiracy going on here. I think that the tax law is what Congress wants it to be. And if it really thought it was a monster, it would probably repeal it, which it’s not doing.

In any case, with billions in taxes at stake, there’s no easy fix in sight. I’m Bob Moon for Marketplace Money.

All right. So the AMT is probably too complicated for taxpayers who wanna file by computer software. But if you do wanna test the do-it-yourself waters, which software program is worth your money? The Wall Street Journal’s tax columnist Tom Herman did a comparison between two popular programs into its TurboTax and TaxCut by H&R Block.

I tested both of them. I found that if you have a lot of complicated tax questions, the TurboTax came out better. If you had a relatively simple situation, then I said TaxCut, which is made by H&R Block, will do just as well. But if your situation is complicated, I have found TurboTax to be much easier. For example, one very nice feature of TurboTax is that I was able to download all of my wage information from my employer directly into TurboTax online. I just hit a few keys and all the information whooshed automatically into TurboTax and onto the right lines. With TaxCut, they don’t have that feature . . .

No whooshing.

. . . so you have to retype all of your information which is a real pain in the neck.

You can listen to my full interview with Tom on our Web site, and you can also take it with you as a podcast, just click on the tax file link.

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