Jim and Kristin Searcy never imagined they'd be penalized for having six children, but this year they were — by the IRS — to the tune of $2,133. The Searcys, of Lincoln Park, Mich., became ensnared by the alternative minimum tax, or AMT.
"I had no idea what it was about," says Jim. "It was a total surprise to me."
The goal of the AMT was to limit tax deductions claimed by the rich. But due to inflation, the AMT has gradually worked its way down the income scale and now threatens millions of middle class families. And since AMT taxpayers are barred from using the child tax deduction, the larger the family, the bigger the penalty.
"It seems like a perverse kind of birth control, you know?" says Jim. "You don't want to have more kids because you'll be taxed more."
Tax advisor Michael Kitces calls the AMT the "stealth tax" because of how it sneaks up on unsuspecting victims.
"If Congress doesn't do something big, the numbers and projections we're seeing say that one out of every three taxpayers in the entire country are affected by the year 2010," says Kitces.
Currently, taxpayers earning between $50,000 to $100,000 a year are rarely affected. But over the next five years, by 2010, more than 60 percent of people making $50,000 to $100,000 a year will be slammed by the AMT.
President George W. Bush and Congress have said they'd like to do something about the AMT, but congressional sources say eliminating the tax is unlikely anytime soon because the price tag is too high — more than a trillion dollars in lost revenue over the next ten years.
Which means the Searcys and millions of other middle class families could remain in the grip of the Alternative Minimum Tax for years to come.
