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1 Gerald Prante, Hypothetical Examples of Families Affected by the AMT Patch 1 (2007)

handle is hein.taxfoundation/ffbbdxz0001 and id is 1 raw text is: FO01UaltND AT 10O&N Hypothetical Examples of Families That Are in the AMT Patch Fiscal Fact. No. 113 by Gerald Prante December 12, 2007 Given the attention that the Alternative Minimum Tax (AMT) is garnering right now in the media and on Capitol Hill, we provide here some hypothetical examples of families whose tax liabilities would change if the AMT were patched, i.e., if the exemption amount were increased for 2007. These hypothetical people would also be affected by the possible refund delay this spring should the AMT patch be enacted later and made retroactive. (Note: The hypothetical families selected here are not necessarily representative of the overall distribution of AMT payers. For more information on the overall impact of AMT, see our previous work on the issue, available here.) In the examples presented below, we assume that the AMT exemption amount under a patch for 2007 would be $66,250 for married couples. We assume in each case that the family earns all its income in wages and salaries and that it itemizes deductions. Among its deductions, we assume that the deduction for state-local taxes paid is 5 percent of the family's income in a low-tax state but 10 percent of income in a high-tax state, that the mortgage interest deduction equals 8 percent of income, and that the charitable deduction equals 2 percent of income. We assume no other deductions and only the child tax credit, when applicable. In these examples, we illustrate the three main drivers of AMT: high state and local taxes, high but not stratospheric income, and large families, with special focus on high state-local taxes because those make the biggest difference among AMT filers. Throughout this AMT debate, politicians have expressed great concern about the new AMT payers without addressing the fundamental question of whether the underlying provisions that are pushing people into AMT are sound tax policies. For example, look at family scenario #1, which takes children out of the equation and is therefore slightly less complex. Here we have two couples exactly the same except that one lives in a high- tax state and the other in a low-tax state. Currently, Congress is in a lather trying to protect family #1b who, because they live in a high-tax state, will have to pay an additional $212.50 in

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