Saturday, November 11, 2006

Fix income trusts? Fix the AMT

I wrote a post back in March mentioning how the Alternative Minimum Tax which was meant to go after wealthier people and their tax shelters has wound up being a whammy against the middle class. With the income trust annoucement last week, one unintended consequence may be that thousands more Canadians may now be subject to the AMT as previously sheltered income sources are deductible no longer -- or to be more accurate, the distributions from flow-through entites must now be added back to income to determine if the AMT applies. Because the $40,000 exemption for the AMT has remained unchanged since its introduction in Canada in 1985, this and next year are going to be extremely nasty for seniors even with an increased age exemption.

I stand by my assertion ending the holiday on income trusts is a good idea, but I'm beginning to wonder if the Harperites could have handed the phase-out of the shelter a lot better.

It's not Canada, of course -- the AMT is especially regressive in the United States. One positive that may come out of the election of the Democrats in the States is movement, finally, on reforming the AMT there. WaPo reports today that leaders in the donkey party, who are going to take over key committee chairs in January, say that the tax savings that could come from fixing a tax unreformed since the 1970s would produce far more benefits than Bush's upper class tax cuts, which Dubya wants to make permanent beyond when they expire in 2010. It's become especially a big problem in the Blue States. In the District of Columbia and its suburbs in Maryland and Virginia, at least 100,000 more families will pay AMT next year than did in 2003. On average, the tax hit is about $6800 more than it would be under regular tax.

Those who get hit tend to have incomes around $100,000. Unfortunately the exemption on the AMT is actually going down next year, and those who got even modest benefits from the Bush tax cuts will see them taken away by the AMT. Meanwhile, those earning over a half million will get off xcott free since their higher income tax rate minus exemptions still means paying more tax than the AMT. In other words, the upper class tax has become the middle class tax -- and soon it will be a tax on the working class.

It's obvious the AMT has to be fixed in the States. The same applies to Canada. I'd reset the exemption at where it currently is, $40k, to where the highest tax rate kicks in -- for 2006 that's at $118,285 -- and have it indexed yearly to account for inflation as the regular tax rates are. The AMT should return to its original purpose, ensuring all people pay their fair share, rather than dumping the burden on the working and middle classes. This is not just for the benefit of seniors and other relying on trust income, but for everyone.

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