President Trump has made clear he doesn’t like the alternative minimum tax, a complex federal levy that will hit some 4.8 million taxpayers this year.
A two-page tax return, filed by Trump for 2005 and revealed Tuesday, may suggest one reason. Because of the AMT, Trump was required to pay about $38 million in taxes on income of more than $150 million that year.
Without it, Trump’s bill would have been a lot lower.
The AMT, which Trump has proposed eliminating, operates as a sort of parallel tax: If you claim too many of the wrong kind of deductions and try to get by with paying too little, you automatically find yourself bumped into the world of the AMT, where different rules — and higher rates — apply.
In other words, if you thought you were going to lower your tax bill by claiming a lot of deductions, think again.
The AMT was passed into law in 1969, amid public outrage over reports that some 155 ultrawealthy people had escaped paying federal taxes altogether by using loopholes and tax shelters, says Leonard E. Burman, director of the Urban-Brookings Tax Policy Center.
But over time, it has morphed and changed and now sucks in a lot of taxpayers who are merely very comfortable.
“It is a stupid tax. It’s poorly targeted,” Burman says.
The people most likely to be hit with the AMT are not billionaires, but people earning incomes of $500,000 to $1 million a year. Burman says 62 percent of them are expected to pay the tax in 2017.
Of those who earn between $200,000 and $500,000 a year, 31 percent will pay the tax.
But among those making more than $1 million a year, only 18 percent get hit.
That’s because the AMT tends to kick in for certain kinds of deductions more than others.
If you live in a high-tax place such as New Jersey or New York and deduct the state and local taxes you pay, that deduction will be counted toward the AMT. The same goes for people who claim children and other dependents as personal exemptions.
But the types of deductions favored by the ultrawealthy, such as tax shelters, don’t get counted, Burman says. Income from capital gains also gets preferential treatment under the AMT.
That means someone like Warren Buffett, who gets most of his income from stock investments, can pay a very low rate without triggering the AMT, while a well-paid executive from Westchester County with lots of kids probably can’t.
Why Trump got hit by the AMT in 2005 isn’t clear without more details than were included in the two-page return released Tuesday night by journalist David Cay Johnston.
“There are a bunch of technical preferences that can throw you onto the AMT, and it looks like Donald Trump fell afoul of one or two of them,” Burman says.
Whatever the reasons, the AMT meant Trump had to pay much higher taxes than he otherwise would.
“Without the alternative minimum tax, Donald Trump would have paid a lower tax rate in 2005 than the poorest half of Americans — just 3.48 percent — despite income of more than $150 million. Trump wants to abolish the AMT. Now we know why,” said Americans for Tax Fairness Executive Director Frank Clemente.
Trump is by no means the first politician to take aim at the AMT. In fact, economists, tax lawyers and members of Congress have long discussed abolishing or reforming it.
But it’s never happened, in part because it raises too much money. The AMT is projected to bring in some $40 billion to $50 billion a year to the federal government over the next decade.