Chart: Percentage of taxpayers paying the alternative minimum tax, by town
A federal tax originally designed to prevent the super-rich from avoiding taxes altogether continues to dun more and more of North Jersey, including thousands of families earning less than $100,000. The latest data from the Internal Revenue Service shows a dramatic increase in the number of North Jersey families required to pay the alternative minimum tax, which produces higher bills than the regular income tax. New Jersey is home to the highest percentage of AMT payers in the nation.
There is general agreement in Congress that the AMT is growing out of control. But there is wide disagreement about how to fix it, because there are political downsides to each of the three options available: cutting spending, raising taxes or increasing the deficit. The Senate recently tried but failed to pass a one-year patch that would have kept an extra 21 million families, including 1.5 million in New Jersey, from being subjected to the tax. On average, these families will owe $2,100 more in taxes in April if Congress doesn't act.
| The debate
U.S. Rep. Bill Pascrell Jr., left, supports a patch to prevent more families from having to pay the alternative minimum tax. His Republican colleague, Scott Garrett, right, says Democrats should reduce spending if they want to cut revenues. * * * Signs of growth
People filing taxes compared with the growth of those paying AMT:
*Towns in The Record's coverage area Source: 2005 Internal Revenue Service income statistics for New Jersey ZIP codes * * * CAPITAL GAMES
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Herb Jackson, Washington correspondent for The Record, takes readers beyond the headlines to provide full interviews, speeches, and what officials are saying about each other and themselves.The deadlock makes the prospect for long-term relief seem dim. "There's not enough effort and not enough guts to do a whole permanent solution for AMT right now," said Rep. Bill Pascrell Jr., D-Paterson, a member of the tax-writing House Ways and Means Committee. Pascrell strongly supports the patch bill that passed by a largely party-line vote Nov. 9 in the Democrat-dominated House. It's called a patch because it fixes one part of the AMT -- increasing the size of the standard AMT exemption to keep pace with inflation -- rather than revamp the whole tax. (An exemption is the amount a taxpayer is allowed to exclude when calculating how much taxes he owes.)
Since 2001, Congress has approved short-term patches, but the latest expired at the start of this year. Without further action, the tax reverts to 2001 levels, which would raise taxes on people whose incomes simply kept pace with inflation in the past six years. If the patch protecting these taxpayers passes, the House version of the bill makes up for the projected $50 billion in lost revenue by increasing other taxes, mostly on investment-fund managers whose incomes are currently taxed at the 15 percent capital gains rate, and on corporate executives who are able to defer compensation.
But Senate Republicans and a few Democrats do not want to replace the lost revenue and have blocked consideration of the House bill.
'Pay as you go'
The battle is the first significant showdown over the Democrats' "pay-as-you-go" promise not to approve tax cuts or spending increases unless they are offset by spending cuts or additional revenue that would prevent an increase in the federal deficit. In Capitol jargon, this is known simply as "pay-go." "We said we're going to do pay-go and we're going to do it. If they [the Senate] don't pay for it, I'm not going to vote for it," Pascrell said.
Rep. Scott Garrett, R-Wantage, opposed the House bill and argued Democrats should reduce spending if they want to cut revenues. He has introduced a bill to repeal the AMT, but has not said how he would make up for the lost revenue. If there's this kind of disagreement about a $50 billion patch, which most analysts believe ultimately will be approved, the rifts will only be magnified if Congress were to take up the bigger issue of reforming the entire AMT, which would cost as much as $800 billion over the coming decade.
So the AMT keeps churning on, and continues to snag more and more families, especially in New Jersey. That's partly because New Jerseyans have the highest median incomes in the country, but it's also because of the state's high income and property taxes, which are deductible from the regular income tax but not from the AMT. Taxpayers are required to figure out what they owe under both the regular income tax and under the AMT and pay whichever is higher. For those who pay high property taxes, taxes under the AMT may be higher because of the lack of a property tax deduction.
AMT grows in N.J.
IRS data released in September for each ZIP code in the state for tax year 2005 illustrates the situation. While only about 3 percent of taxpayers nationwide paid AMT, the rate was nearly 7 percent in New Jersey overall, more than 10 percent in Bergen County, and more than 20 percent in 14 different North Jersey communities. The number of households paying AMT increased by more than 10,600, or 22 percent, in communities served by The Record in Bergen, Hudson, Morris and Passaic counties between 2004 and 2005. Statewide, the number of AMT payers grew 24 percent.
Among those being added to the rolls of AMT payers in North Jersey were 544 families that had incomes under $100,000, a 20 percent increase over 2004. That's significant because the AMT was originally created in 1969 in response to congressional outrage that a few hundred of the wealthiest people in the country were using elaborate tax shelters to avoid paying any income tax. At the time, these super-rich individuals had incomes of about $200,000. The AMT was not indexed for inflation, as the regular income tax brackets were in 1984. As a result, incomes that qualified as super rich in the late 1960s barely raise an eyebrow in North Jersey today. "The basic issue with the AMT, most people feel, is not the levels of tax it imposes on high-income people, it's the fact that it can reach people with not-so-high incomes," said Aviva Aron-Dine, a policy analyst with the Center on Budget and Policy Priorities, a liberal think tank.
Aron-Dine said that people making as little as $75,000 are paying AMT, although the increase over the regular income tax tends to be small. Although members of Congress say no one intended such people to pay AMT, Aron-Dine said that's not entirely true. She said Congress intentionally put limits on the extent to which people could use certain deductions, such as those for property taxes, to reduce their federal tax burden.
Suggested remedies
Proposals for overhauling the AMT run the gamut from making the "patch" permanent to making state and local taxes deductible under the AMT formula to outright repeal. A sweeping overhaul proposed in October by Rep. Charles Rangel, D-N.Y., chairman of the Ways and Means Committee, was touted as providing a full repeal. But it also imposed a replacement tax that limited the benefits for couples with adjusted gross incomes of $500,000 or more and individuals earning $250,000 or more. There's not much chance Rangel's bill will move in this congressional session, but it could be the starting point for the future, said J.D. Foster, a senior fellow at the Heritage Foundation, a conservative think tank.
"We know in 2009 or 2010 there's going to have to be a huge tax bill," Foster said, because the 2001 tax cuts are due to expire and Congress will likely want to extend at least some of them. "This is really about positioning for that tax bill and what's going to be in it."
FREQUENTLY ASKED QUESTIONS ABOUT THE AMT
What is the alternative minimum tax?
It's a tax that runs parallel to the regular income tax. Everyone is supposed to calculate what they owe under the regular income tax and under the AMT, then pay the higher amount.
How does it work?
You have to add back some of the deductions and exemptions that the regular income tax allows to get to a number called your AMT taxable income. Then you subtract an amount set by Congress, known as the AMT exemption, and multiply the difference by the AMT tax rate. The rate is 26 percent for couples filing jointly with AMT taxable income of $175,000 or less; over that income, it's 28 percent.
What would make someone who is not paying AMT now have to start paying?
As many as 21 million more people -- including 1.5 million in New Jersey -- would suddenly be forced to pay it on this year's income if Congress does not extend the law that gradually increased the AMT exemption each year since 2001. However, assuming that extension passes, there are other things that could send someone into the AMT. A big jump in income, either from a pay raise or a spouse going to work, could do it. But the AMT also caps how much you can deduct from your income before calculating how much tax you owe, so you could end up having to pay the AMT if your exemptions or deductions go up. The most common ways that happens are having another child, or paying more state income or property taxes.
How much more do you have to pay?
It depends on the individual situation. Take a couple with two children making $150,000 a year and paying $20,000 in mortgage interest, $12,000 in property taxes and $7,000 in state income taxes. They did not owe AMT in 2006. But:
• Suppose they had a third child. The regular income tax says they are allowed to subtract another $3,300 exemption from their income, which should reduce their tax bill by $815. But they would also have to calculate what they owe under the AMT, and pay the higher amount. The AMT requires them to add that $3,300 back and would produce an AMT liability that is $785 higher than their regular income tax liability. Thus, the tax "savings" from the additional child would be less than $30.
• Suppose their property taxes went up by 3.5 percent, or about $400. The regular income tax allows them to deduct that $400 increase from their federal taxes, which would lower their federal tax bill by about $100, if that were the only set of tax rules that existed. But they also have to figure what they owe under the AMT, and that liability would be $75 higher than the regular income tax, and that would be the bill they had to pay. So, again, the savings would be less than $30.
Do they take enough out of my paycheck for this?
Not likely. The standard withholding tables are based on the regular income tax.