The Finch Formerly Known As Gold

21 January 2007

Rewiring the AMT machine

Fritz Schranck proposes a new formula for the Alternative Minimum Tax:

The new AMT should be set at 15% of adjusted gross income — but any payments toward any FICA or Medicare taxes would be credited against the income tax payable under the alternative.

This approach would make sure that the higher income folks now subject to AMT would still pay a significant amount of tax. At the lower end of the potential AMT spectrum, however, there would be an increasing likelihood that those folks wouldn't "qualify" for AMT treatment. It also has the added benefit of protecting more of the self-employed from the alleged ravages of the AMT, since they already directly pay a greater percentage of income in Social Security/Medicare taxes.

I don't meet the AMT threshold, but I did the math for myself, and assuming the standard deduction, which seems reasonable since AMT disallows most deductions anyway, I come up with a tax bite $1850 lower under the Schranck plan. I am, however, itemizing deductions this year, so the actual theoretical benefit would be lower, assuming the existence of such a thing as an "actual theoretical benefit." Further, I expect that were this approach adopted, there would be some tweaking to make it "revenue-neutral." As Mr Schranck notes:

[T]hose now seeking AMT reform haven't openly addressed exactly where the Feds will replace the billions of tax revenues lost, if the AMT as we now know it was to be simply repealed. Somewhere in the current AMT chatter there needs to be some discussion about whether the Feds will forego all that money, and if not, who among us will be asked to make up most if not all of the difference.

And that's quite a difference: the AMT will bring in something like $65 billion this coming year.

Posted at 7:14 PM to Common Cents

Maybe not this year, but did you noticed the threshold for next year is 45K?

Posted by: Tatyana at 7:41 PM on 21 January 2007

So I noticed. I don't think I'll quite reach that in 2007, unless I put in a lot more overtime.

Posted by: CGHill at 8:18 PM on 21 January 2007