Alternative Minimum Tax Time Bomb Explodes in 2010

Congress created the Alternative Minimum Tax (AMT) in 1969 because of a story in the Wall St. Journal about 100 millionaires who paid no income tax.  The primary reason they did not pay any income tax was because they had invested in tax free municipal bonds, a type of investment that produces earnings that are not taxed under the federal income tax law.  Congress created tax free municipal bond investments to give people an incentive to invest money in investments that paid lower rates of return than many taxable investments.  Bottom line:  Congress decided in 1969 to punish tax wealthy people who took the bait and invested in the tax-favored bonds.

Fast forward to 2010 and the 1969 AMT bomb will fully detonate.  “The Individual Alternative Minimum Tax: Historical Data and Projections, Updated October 2009” examines the history of the AMT and explains the damage that will soon occur.

The alternative minimum tax (AMT), which originally targeted high-income taxpayers, requires annual legislation to prevent it from affecting millions of middle-income individuals each year. There are two primary reasons for the AMT’s broadening impact; its parameters are not indexed for inflation and the 2001-2006 tax cuts reduced regular tax liability without changing AMT liability. In 2009, four million taxpayers will pay $33.5 billion in AMT, but without congressional action that number will rise to 27 million owing $102 billion in 2010.

Why is it that a law that was intended to raise revenue from a small number of super rich Americans will soon cause 27 million taxpayers to pay $33.5 billion?