Rich people are, politically speaking, an easy target. After all, there are much fewer of them than members of the middle class. The rich are, more often than not, envied by the not-so-rich. So laws that attack wealthy individuals are much easier to pass than laws that affect the more numerous middle class.
But it’s a funny thing the way laws designed only to affect the upper crust of society end up coming back to haunt us all.
The U.S. federal income tax was first passed as a law that affected only those with extraordinarily high incomes at the time — and even for those lucky few the rate was very low. Now of course, income tax affects almost everyone, and has a devastating effect on the lifestyles of the middle class.
You may recall several years ago when the Alternative Minimum Tax (AMT) was passed. This was a response to the vocal and often paranoid cries about the very rich avoiding income taxes through shelters, credits and other tax-avoidance schemes. In order to satisfy the political demand, Congress made AMT part of the tax code. But it would just affect the very rich.
Lo and behold here we are in 1997 and Congress has just passed another tax “reform” bill, the cruelly-named Taxpayer Relief Act of 1997. What you may actually be about to get relieved of is your money and deductions, as AMT starts to hit the middle class.
How can a law like AMT that’s crafted for the rich come to affect so many? Simple — it was never indexed for inflation. Although only 414,000 taxpayers paid the AMT in 1995 that number is quickly rising and by the year 2005 a family of four with an income of $58,300 in 1996 dollars could be subject to AMT. However, even that calculation assumes an inflation rate of only 3%. If the inflation rate rises many more taxpayers would be pushed into AMT much sooner.
If you are subject to AMT, you lose your property tax deductions as well as the just-enacted child and tuition tax credits. More importantly, you lose your deductions for state and local income taxes. Lacking those deductions, the same dollar of income could be taxed three different times — at the state, local, and federal levels. Let us know if there’s anything left.
Even if you don’t end up owing the AMT, you may very well be required to submit the very complex calculations, adding quite a few more dollars to your tax preparation bill.
Analysts say that lawmakers and their staffs were well aware of the creeping effects of AMT but purposely ignored it because the media and taxpayer groups did not focus on it.
Time to focus….
