More Americans Caught In Tax Trap

Tuesday, June 27th 2000, 12:00 am
By: News On 6

WASHINGTON (AP) — Simply because they live in a high-tax state or claim numerous deductions, thousands of middle-class Americans are paying a special tax originally designed to prevent investors and the wealthy from sheltering too much income.

The IRS says 828,000 taxpayers were caught in the tax trap in 1998 — a 25 percent increase over the year before.

The numbers are expected to go nowhere but up, mainly because the alternative minimum tax was never indexed for inflation. As incomes continue to rise and Congress gives people more deductions and credits, more and more taxpayers will be forced to pay this tax.

``It's catching people it was never intended to catch,'' said Hank Gutman, a partner in the Washington office of the KPMG accounting firm. ``It's making people go through a lot of complexity and they don't even understand why.''

The alternative minimum tax is essentially a parallel income tax system created in 1969 to ensure that the wealthy and corporations could not entirely escape taxes through legal means. Income is taxed at up to 28 percent, and numerous deductions and credits — including those for state income taxes and unreimbursed employee business expenses — are either not allowed or have greatly reduced benefits.

Internal Revenue Service figures released Tuesday show that about 480,000 taxpayers paid $2.8 billion in minimum taxes in 1996. A year later, the number of taxpayers affected jumped to 618,000 who paid just over $4 billion — a 42 percent increase — followed by another increase to $4.4 billion in 1998.

There is also further evidence that the minimum tax is reaching more middle-income families. For example, in 1996 about 59,000 taxpayers with adjusted gross income between $75,000 and $100,000 were subject to the tax. A year later, that number had grown to almost 86,700 taxpayers.

``This shows once and for all that when taxes are meant to soak the rich, it's usually the middle class that gets wet,'' said Rep. Bill Archer, R-Texas, chairman of the House Ways and Means Committee.

Such taxpayers pay the bottom 15 percent income tax on a great portion of their earnings and can take a broad range of deductions under the ordinary tax system. Under the alternative system, they must pay a flat tax of either 26 percent or 28 percent and cannot enjoy many of those same deductions.

``It really does seem to take more than its share of a bite,'' said Maggie Doedtman, a senior tax research specialist at tax preparer H&R Block. ``Something that wasn't ever designed to hurt John Q. Individual is now doing just that.''

Thousands more people would probably be forced to pay the minimum tax, particularly those with large families living in high-tax states, if Congress and President Clinton had not agreed to ensure that breaks such as the $500 per-child tax credit would not trigger the special tax. That protection is temporary, however; the current exemptions run only through 2001.

``We're very concerned about that,'' said Sen. William Roth, R-Del., chairman of the Senate Finance Committee.

Roth and other GOP leaders tried last year to begin repealing the minimum tax as part of a larger tax cut bill, but it was vetoed by Clinton. Yet the president's on IRS taxpayer advocate, Val Oveson, recommended earlier this year that it be phased out and called it ``unnecessarily complex and burdensome.''

``Often, the way many individuals first hear of the alternative minimum tax is when they receive a notice from the IRS,'' Oveson said.

Despite growing federal budget surpluses, the sheer cost of repeal — estimated last year at more than $80 billion over 10 years — gives many lawmakers pause. Clinton this year proposed gradually making certain that all personal exemptions could be deducted without triggering the tax and ensure that taxpayers could take the standard deduction under the minimum tax instead of being forced to itemize.

Congress, however, has largely ignored that 10-year, $33 billion plan, mainly because the minimum tax will be kept away from most middle-class families until after 2001 under current law.

``They have taken some of the pressure off, but all of these are sort of band-aids,'' said KPMG's Gutman. ``The real question is, why do we have this thing today?''