The Devil Is In The AMT
EGTRRA (the Bush tax reduction
law) has done good things for small business pension plans -- as the cover
story in our premier issue will delineate -- but will in time boost the
effective personal income tax rates of many small business owners because of
the stealth effect of the alternative minimum tax on the tax liabilities of
middle income taxpayers. A recent piece in the LISI collection of estate
planning newsletters (founded by our Editorial Advisory Panel member, Steve
Leimberg), observes that if EGTRRA had not been enacted, there would be
about 23 million taxpayers subject to AMT in 2012; but with EGTRRA's
combination of lower income tax rates and higher credits, that number is
expected to rise to 41 million.
The author, Michael Nelson,
senior trust officer of the Iowa Savings Bank, notes that the burden will
land largely on those with incomes between $100,000 to $500,000. Curiously,
those with incomes higher than that will get a tax reduction! By
comparing the income tax rate brackets from the government’s tables with the
effective rates that would be required without the AMT to collect the same
amount of tax revenue in 2010, Nelson calculates an effective tax
rate of 43% for those at the upper middle class and an effective rate of 33.2%
for taxpayers above that.
The future shock in store for
even moderate income earners is that, by 2010, 97% of joint filers with
2 children and $75,000 to $100,000 income will be subject to AMT! Mr.
Nelson ironically concludes that a political pledge to make EGTRRA permanent
and never vote for a tax increase sounds good in a 30 second sound-bite until
you dig a little deeper.