Growing AMT Wiping Out Capital Gains and Dividend Tax Reductions
July 24, 2006
The reduced 15 percent tax rate on capital gains and dividend income was a centerpiece of the 2003 Bush tax cut. But as noted in a Bloomberg report this morning, the growing reach of the Alternative Minimum Tax (AMT) is quietly invalidating part of that tax reduction for a growing number of taxpayers (for a detailed explanation of the AMT quirk causing the effective tax increase, see here). From the piece:
When Jeff Trinca liquidated part of his stock portfolio to satisfy a divorce decree in early 2005, he calculated he would owe 15 percent tax on his capital gain. A year later, he got a nasty surprise: a much higher bill from the Internal Revenue Service.
If anyone should have known what to expect, it’s Trinca: He’s a Washington tax lobbyist. Still, he lives in one of some 2 million U.S. households that were denied the lower rate on capital gains last year because of a little-noticed quirk in the alternative minimum tax, originally created almost four decades ago to make sure a much smaller number of affluent Americans were paying their fair share.
Instead of paying the 15 percent rate established by President George W. Bush’s 2003 tax cut, Trinca, 45, and other taxpayers with incomes between $150,000 and $400,000 are required to pay rates of up to 22 percent on their investment income. If left unchecked, the AMT anomaly may deprive millions more six- figure earners — 60 percent of whom voted for Bush in 2004, when he won 51 percent of the vote nationwide — of the low rate…
Affected taxpayers have a right to be angry, given the emphasis placed on the lower rates by Bush and congressional Republicans, says Nina Olson, the national taxpayer advocate at the IRS.
“In this case, you had a lot of placing of importance on lower rates on capital gains and its importance to the economy, yet the AMT undermines that policy,” Olson said in an interview. “When people make a decision based on a stated policy and end up paying higher taxes, of course they’re going to feel frustrated.”