Gobbling through tax returns with only an occasional power-pellet patch to slow it down – welcome to the tax code’s version of Pac-Man!

Created as part of the Tax Reform Act of 1969 to try to insure that high-income filers paid at least some tax, the alternative minimum tax (AMT) is poised to gobble up more and more middle income deductions. While the original intent of trying to inject some equity into a morass of loopholes is one I certainly applaud, they forgot just one critical thing when they enacted the law: It’s not indexed for inflation. So, although in 1969 the income limits seemed astronomical, as of 2007, it’s estimated that single people making at least $75,000 better start looking closely to see if they’re affected – married couples at about $125,000.

How is this like Pac-man? For those of you who don’t remember (source: www.pacmanhattan.com) “at the start of the game, Pac-Man runs along the streets, staying outdoors, within the designated playing area at all times. The ghosts may begin to chase Pac-Man. Pac-Man continues to run the board until all of the dots are ‘eaten’ or one of the ghosts eats Pac-Man.

When Pac-Man arrives at an intersection with an available power pellet he automatically consumes it… Upon consuming a power pellet Pac-Man is ‘invincible’ for two minutes and may eat the ghosts. If a Ghost is eaten, the ghost must return to the starting point before being able to chase Pac-Man again.”

Just like Pac-Man, the non-inflation-indexed alternative minimum tax is also gobbling up ghosts – the ghosts of deductions you thought you had. So far, the only remedy has been patches that are passed each year by Congress to help minimize the damage. Like power pellets, these patches are just temporary. They don’t last and the game is still running.

So more and more people are getting caught in the AMT trap. The Urban-Brookings Tax Policy Center estimates that more than 23 million people could be affected in 2007 if no patch is passed – with the patch, probably about 3.5 million. And without any permanent fix, the AMT just keeps grabbing more and more of middle class incomes.

Deductions people thought they had may not be able to help them after all. Some of these include: state and local income taxes, non-reimbursed business expenses, child-tax credits, home-equity loan interest. And although you can still use the itemized health expense deduction, if you are caught by the AMT, your benefit doesn’t kick in until your health expenses exceed 10% of your adjusted gross (rather than the current 7.5%.)

As for certain environmental deductions like energy-efficient home improvements and hybrid cars… gobble gobble. They don’t count under the AMT either. And I have no idea whether the President’s proposed healthcare deduction plan even takes the AMT into account with its “guaranteed” deductions.

Some of you may be thinking…what’s the big deal? Let the fat cats pay.

But increasingly, it’s more and more of the middle class that’s getting hit. Some estimates say that, if nothing is done, by 2010 almost half of all tax-payers might be caught by the AMT. So much for deductions like the environmental ones that are part of good public policy.

And there’s one more reason every American should care: we’ve come to rely on the revenue from the AMT. Over the next 10 years, it is estimated that this tax will provide approximately 10 trillion dollars. TEN TRILLION!

The longer we wait to fix the problem, the more we rely on these taxes. And with the huge deficit we already have, there is no easy solution. If we simply do away with the increasingly unfair AMT, then what services will we have to cut and who will bear the pain?

For me, the biggest obstacle to finding a solution is how few people even know about the problem – until it hits them. Our government talks about no tax increases and offers all kinds of well-publicized tax breaks, but meanwhile…gobble gobble…more and more middle class people are losing their deductions – and as a result are paying more taxes. Not that we hear about those increases.

And despite the potential large-scale impact of the problem, as of yet there is no simple long-term solution. So what can be done?

Although it won’t be easy, we need to start by taking an honest bi-partisan look at the AMT – as well as the rest of our tax system. And, while I dread saying those two terrifying words “tax reform” – especially remembering that the AMT originated as part of a tax reform package – something must be done soon.

Power-pellets can only work for so long. We need a real, long-term solution. No more games.


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