On Dec 17, 2010, Congress voted and the President approved the so-called patch to extend the “correction” for Alternative Minimum Tax (AMT) to continue through 2012. Unfortunately, that’s not what happened. There is a popular attitude of sneering at this type of issue because of a mantra of those “rich folks need to pay their fair share”. First, let us tell you the history of the AMT and then we will really make you mad when you find out who Congress thinks is too rich and needs to be taxed even more.

AMT (originally called the Minimum tax until 1982) was a vindictive measure initiated by Richard Nixon (1969) to selectively punish about 155 wealthy folks who failed to see him as who they wanted to support. This is certainly an example of the very worst kind of tax policy, but it is far from being the first or only bad example. The tax code is the personal playground of inept and corrupt political thinking. AMT is a parallel set of rules (some are quite bizarre) that are required by EVERYONE to calculate along with the regular tax rules. If the tax with AMT rules result in higher dollars, then there is more trickery to endure. Congress looks at the AMT as just the difference between regular tax and the AMT calculation, so you get to pay the regular tax plus the difference between the two. More rational people would just say you pay the higher of the two calculations, but Congress often has trouble with telling the truth especially about taxes.

AMT was a malignant policy when it started and it is only gotten worse through the years. The lingering trick is that the AMT rules are essentially not effected by price/cost indexing as were many of the items Mr. Reagan pushed to secure for many (but not all!) issues. Indexing was a way to prevent having an automatic tax increase from inflation alone. Congress loves the automatic tax hike as it is essentially invisible, and the media, in general, has conveniently missed the point for decades. So, as inflation moves forward, as it always does over time, the rules for AMT would snare more taxpayers. However, these additional AMT taxpayers weren’t really in the same tip-top earners layer of the original Nixon plot. How many more AMT taxpayers? The numbers rose from 155 households in 1969 to over 600,000 households paying the extra taxes by 1997. In 2008, it had swelled to almost 4 million households paying tax above and beyond the regular tax. If the continuance of the exemption is not reinstated for 2012, then between 27 and 34 million households will pay this addition to regular tax. Virtually all of the additional folks caught in AMT are due to inflation alone and not due to real economic elevation. The trigger this year is the failure to patch (a euphemism for holding off on raising taxes substantially) existing law as has been done for quite a few years.

So, in 2012, who are all these rich folks that are going to finally pay their fair share because of AMT? Here’s one real life example: let’s assume a couple, 40 years old, one a mid-career school teacher and the other a mid-career deputy sheriff. If they have only regular W-2 type salary income, two kids under 17 and take just the plain vanilla personal, dependent and standard deductions, but with an additional $2000 child credit, they would likely see a net $4,000 increase in their tax bill. These “millionaires” would see their real federal income tax bill rise from about $8,000 to about $12,000. And remember theses “millionaires” get to pay FICA and Medicare as usual too.

Let’s look at another “millionaire” example. The husband is 65, a retired Air Force sergeant; the wife is working in real estate sales and made $40,000. The Husband draws military retirement and social security both of which were earned the hard way. The couple has no dependent children and just the plain vanilla deductions as allowed by regular tax rules. Their increase in tax is a mere $2,700. I guess they will need to sell one of their yachts or Aspen condos to cover that increase. Yeah, right!

So the millionaires and billionaires that have been so vilified over the past two years apparently include folks whose combined household income tops $75,000 of adjusted gross income. These “filthy rich” are the people who, some say, need to start paying their fair share of taxes. Apparently, these filthy rich have been paying for many years without Congress having to dirty their hands by raising taxes- because the tax increase is already on the books. What competent journalist with even a modicum of tax knowledge and a decent portion of common sense would not want to report this political subterfuge? What ethical elected legislator would not be fighting hard against this outrage? Surely there is not a shortage of competent journalists or ethical legislators?

Perhaps to the delight of Congress, the average taxpayer hasn’t the foggiest notion of what AMT is, who will pay it, or the sleight-of-hand trickery that will massively increase taxes for those who are subject to it. We ran a very informal and unscientific poll of a few dozen folks to get a feel for just how much this issue is below the surface. Those polled probably averaged 40 years old, mostly college graduates, and were involved in either returning to school later in life or part of civic organizations. Doctors, lawyers, plumbers, retail merchants, civil servants, retired, active military, real estate agents, elected officials…a nice spectrum of generally informed and engaged people. About 60% were certain they had never paid AMT and 40% were unsure if they had or hadn’t paid the tax. Nearly 80% were not aware that it was in addition to regular tax only found on higher household income returns. We did not encounter a single person who was aware that AMT was barreling down the tax track and was already in motion for the 2012 tax year. Somewhat of an ugly surprise party is being scheduled for the 2012 tax year.

None of the people polled were accountants, so do not think they were an ignorant lot just because they were not skilled in murky tax law. One half of this writing team taught federal tax for over 20 years at a university and AMT was one of the topic minefields that the students feared the most. It’s more than a little odd even by tax standards. By the way, there’s a corporate version of this alternative minimum tax game as well, so corporate income has the opportunity to be taxed more than twice: income to the corporation (but no deduction for ordinary dividend distributions) plus income tax to the shareholder who received the dividend. The tax man can come three times to visit the bones of corporate profits if a minimum tax is tacked on to the regular tax.

More than likely, both sides of the aisle will let this stealthy alternative minimum tax issue linger as they have a very short attention span during campaign mode. Then they will likely try to “rescue” us with an 11th hour bill after the election. We have strong doubts about enough from both houses of Congress would stand up and be counted on the front side of the year. In the meantime, many ordinary, hard-working, productive people who are definitely not fat cats simply cannot plan their economic lives because of the huge uncertainty about the few discretionary spending dollars they may (or may not) have for 2012. If they escape the tax with a last minute rescue, the economy will be somewhat damaged anyway as the word gets out and people hold back on their spending during the year. Worse, if it activates fully, literally millions of modest income households will be faced with a tax bill they neither saw coming nor can afford to pay before April 15th, 2013.

Dennis Mitchell is certified as a Qualified Environmental Professional (QEP) by the Institute of Professional Environmental Practice (IPEP) and is presently the chair of Ethics Committee for IPEP. He was a recipient of the Lifetime Honorary Award from the International Air & Waste Management Association in 2001. He was chair of the Climate Change Panel at the 104th International a&WMA Conference. He has been a member of Louisiana Society of CPA’s since 1985 and retired from Troy University where he taught both in both science and accounting.

Muncelle Mitchell, Practicing Attorney (Mississippi and Florida); Member of the Mississippi Military Affairs Committee 2009 to 2011). She is an active member of the International, Florida Section and the Coastal Plains Chapter of the International Air & Waste Management Association. She was the legal advisor for Climate Change Panel at the 104th International A&WMA Conference.