Summary:
The AMT can increase taxable income and taxes by disallowing exemptions, standard deduction, employee expenses etc.

The dumbest tax law Congress ever passed is the Alternative Minimum Tax--and if it hasn’t slammed you yet, stay tuned.

It’s a tax designed to hit the rich. But a Kansas couple with 10 children and taxable income of $34,092 owed the AMT. So did an Ohio businessman with after-employee-expense income of $15,595.

Within four years, more than eight million Americans will pay the AMT. Millions more will fill out two sets of forms just to find out whether they should pay. Once both taxes are computed, they pay the higher tax. Failure to pay the AMT can result in penalties. It’s a stupid law.

Average taxpayers are shocked: Under the AMT these deductions are partially or totally thrown out the window: nonbusiness taxes, interest, medical and casualty, expenses of investors and employees, the standard deduction and personal exemptions for taxpayers and their dependents.

The Ohio businessman had state and local taxes of $5,000; under AMT he couldn’t deduct these or his employee expenses. He paid AMT of $4,233 for income after employee expenses of $15,595.

Under the AMT, the Kansas family with 10 children could not deduct medical expenses, state and local taxes or personal exemptions. The couple argued before the Tax Court that the law was never intended to apply to a large family living on taxable income of $34,000. But the court said the law is clear: Even large families must pay.

Any large nonbusiness expense on your tax return can mean you should pay the AMT. Go figure. That is, go figure taxes both ways, then pay the higher amount.

In 1969, Congress caved into public pressure and passed the AMT, supposedly aimed at the 155 high-income individuals who paid no taxes that year. It was intended to force the wealthy to pay taxes they escaped using tax shelters.

It was a bad bill from the beginning. Legislators made three major mistakes that cost average taxpayers today:

• They didn’t provide for inflation when they set up exclusions. Lawmakers didn’t consider that what cost $100 in 1969 might cost $500 today. The exclusion should have increased accordingly--it didn’t.
  
• They failed to limit persons liable to those who bought tax shelters, who were the reason they passed the law.
  
• They shouldn’t have passed the law. Legislators could force the wealthy to pay taxes by reducing or eliminating Tax incentives that created shelters. How simple could that be?
  

It’s long past time for Congress to admit its error and bury the AMT.

(more at Legislation)