Minimum Tax Seen Snaring 50% in New Jersey: BGOV Barometer

Half of the taxpayers in New Jersey are vulnerable to paying more for 2012 if Congress fails to prevent an alternative tax from snaring people below the top income brackets it originally targeted.

Without action by Congress, the number of taxpayers subject to the alternative minimum tax for 2012 would jump to 32.4 million from 4 million in 2010, Congressional Research Service figures show.

The BGOV Barometer shows New Jersey AMT returns would increase to 50 percent from 6.4 percent two years ago as a share of all federal income tax filings by the state’s residents, according to CRS and Internal Revenue Service data. More than 40 percent of federal taxpayers in Connecticut and New York would be subject to the alternative tax unless Congress acts.

The AMT requires taxpayers above certain income levels to figure their liability a second time under a separate set of rules that disallow or limit some exemptions and deductions and then pay whatever tax is higher. The system isn’t indexed for inflation, so Congress periodically adjusts the system to ensure it targets only the highest earners. This year the adjustment is part of congressional negotiations to avert more than $600 billion of tax increases and spending cuts before next year.

“If Congress doesn’t fix this by Jan. 1, you and I don’t know what our taxes are,” Leonard Burman, a professor at Syracuse University in New York, said yesterday in a telephone interview. He said that the so-called fiscal cliff negotiations are making it harder. “If it were just the AMT, Congress would have fixed it and gone home by now. It wouldn’t surprise me at all if we don’t resolve this until January.”

Disproportionate Effect

The AMT disproportionately affects taxpayers with large families and those in high-tax states such as New York and New Jersey. State and local taxes can’t be deducted by AMT-paying households.

If Congress fails to act, New Jersey would see its number of AMT payers jump to 2.2 million for 2012 from 275,000 two years ago, according to Congressional Research Service data. The IRS projects New Jersey residents will file 4.4 million returns for 2012.

In Connecticut, where 5.6 percent of taxpayers paid the AMT two years ago, the CRS report projects the number subject to the tax would rise to 777,000, or 44 percent of the 2012 returns projected by the IRS. New York, where 5.3 percent were subject to the AMT in 2010, would see 3.9 million paying the higher tax for 2012, or 41 percent of 2012 returns, the CRS projections show.

Burman, who used to be director of the nonpartisan Tax Policy Center in Washington, said that for people with incomes in 2011 dollars between $200,000 and $500,000 the average tax bill would have gone up by $5,856 without the patch. That amount would have been $2,897 for those with incomes between $100,000 and $200,000.

Shrinking Refunds

If Congress doesn’t fix the AMT, tax collections would increase by $92 billion, shrinking or erasing many taxpayers’ expected refunds. Congressional inaction would also create processing delays for the Internal Revenue Service, which has its computer systems programmed on the assumption that Congress would prevent the AMT’s expansion.

“Taxpayers and the IRS need to know what the tax provisions are for 2012 so that you know what you owe and we know how to process your return in January,” Steven Miller, acting commissioner of the IRS, said at a tax conference yesterday in Washington.

Congress created the forerunner of the AMT in 1969 in response to reports that 155 high-income taxpayers owed no income taxes.

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