Alternative minimum tax fix could solve many issues

Here’s the beginning of a joke you’ve heard before:  The inmates of a prison memorized hundreds of jokes which they numbered. Since everyone knew all the jokes, they saved time by calling out numbers.

Tax Simplification Alternative Minimum Tax alternative minimum tax
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Now imagine a prison that houses just accountants, where they’ve devised a numerical list of jokes.

Question: What is the number of the joke that always gets the most laughs?

Answer: 6251

Just in case you’re not an accountant, 6251 is the number of the form required to calculate your Alternative Minimum Tax liability. The form itself is just two pages, but try reading the fourteen pages of instructions. Filling out 6251 is surely the primary reason why so many of us need to hire accountants or tax preparers to do our taxes.

The main purpose of the AMT is to ensure that the rich pay their fair share of taxes. But increasingly, the burden of this tax is falling on people earning as little as one hundred thousand dollars a year. Often, they need to hire someone just to figure out if they must pay this tax, let alone how much they owe.

The rich and the super-rich, receive nearly all of their income from long term capital gains, which are taxed at a lower rate than both ordinary income and income subject to the AMT. So, in effect, the AMT not only does not ensure that the rich pay their fair share of taxes, but it imposes an increasing tax burden on the upper middle class and the near-rich.

Let’s get back to Form 6251. If you have a relatively low income, then you don’t have to fill out this form. And if you’re in the one percent, then you almost certainly do need to submit the form with your personal income tax return.

But what about all the rest of us – those earning over $100,000, but less than, say $500,000? Do we need to pay the Alternative Minimum Tax? There’s only one way to find out: Fill out Form 6251.

The IRS expects us to either spend many hours filling out this form, or else hiring someone else to do the work for us. So even if you end up not having to pay the AMT, you still lose.

To sum up: Congress passed an amazingly complicated law, which the IRS has to enforce. That understaffed agency decided to let the taxpayer do all the heavy lifting. And then, for good measure, it came up with 6251, to make that job nearly impossible, unless, of course, you happen to be a CPA.

Think of all the time and expense that tens of millions of Americans must devote to just paying their taxes. Clearly then, any meaningful tax simplification must begin with either abolishing the Alternative Minimum Tax, or greatly simplifying it.

Article by Steve Slavin

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