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Published: Monday, 2/26/2007

Federal code changes pose challenge

BY HOMER BRICKEY
BLADE SENIOR BUSINESS WRITER

"A lot of people are paying the alternative minimum tax who shouldn't be," said Eulan Tucker, Jr., a certified public accountant in Oregon.

Among his clients are a Toledo-area couple who both work, have seven children, and make about $130,000 between them.

Because of their large number of deductions and large mortgage interest payments, that couple found themselves in the nether-land of the AMT.

It's costing them an additional $3,000 a year in taxes, said Mr. Tucker.

They're far from alone.

An estimated 3.5 million taxpayers will be ensnared in the alternative minimum tax this year. The tax was imposed in 1969 to make sure the wealthiest Americans paid at least some taxes no matter how many deductions and write-offs they could come up with.

The problem is, millions of taxpayers are now "rich" enough to pay the alternative tax, mainly because the threshold to be eligible to pay hasn't kept up with inflation.

In the last 10 years, taxpayers subject to it ballooned from 720,000 to the 3.5 million.

The tax collected has multiplied five times from $5 billion a decade ago to $24 billion last year.

And, even though the amount exempted from the tax increased for tax year 2006 - to $62,550 for joint filers, up from $45,000 for 2005 - it's due to fall back to $45,000 for tax year 2007, a move experts say could trap an additional 20 million taxpayers.

Congress is considering changes to mitigate the problem.

Certain types of deductions put taxpayers at risk, including high state and local taxes, child-tax credits, and business expenses for small-business owners and self-employed workers.

Another client of Mr. Tucker generally makes between $130,000 and $170,000 in his sales job but has large out-of-pocket expenses and, therefore, ends up paying the alternative minimum tax.

That adds $2,500 to $3,000 to his bill.

The tax problem has grown in recent years, at least partly because of the tax cuts pushed by the Bush Administration. Many subject to the tax make under $100,000 a year.

And now Congress has another problem: If it reduces the impact of the AMT, it will have to find other taxes to cover the shortfall some estimate at as much as $50 billion.

Bob Stutz, a downtown Toledo CPA, believes the AMT is a good example of a tax that needs changing.

"It's just ridiculous," Mr. Stutz said. "It affects many people, but you don't know until you make the calculations two ways to see if it applies to them. It's frustrating."

Contact Homer Brickey at:

homerbrickey@theblade.com

or 419-724-6129.



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