The Hidden Tax On Large Families
Do more kids mean more taxes? In a few short years they will.
That's right — if you have two or more kids, you could be required to pay more in taxes than a childless married couple in the same tax bracket living next door. Sound unfair? Tell Congress.
Congress originally passed the alternative minimum tax in the 1960s to punish large corporations that dodged paying their taxes through tax breaks that permitted them to accumulate numerous preferential deductions and credits. Congress later amended the alternative minimum tax to apply to high-income individuals as well.
But because the alternative minimum tax has not been adjusted for inflation, it will soon be affecting middle-income taxpayers who take ordinary deductions that no one thinks of as tax shelters.
Those soon to be particularly hit are taxpayers with large families, those who claim multiple deductions for personal exemptions, those who own a second home or those who live in high property- and/or income-tax states.
Thought you were getting ahead by taking deductions for Joseph, Mary, Catherine and John and looking forward to also claiming Peter as a dependent when he is born next month? Think again. In fact, having a large family, as many Catholics do, will almost surely place you under the burden of the alternative minimum tax as early as next year!
“It is a tax that will take people unawares. There is no way to plan for it,” warned Nina Olson, the Internal Revenue Service national taxpayer advocate.
Assuming the rates and standard deduction amount remain unchanged in 2005 from 2004, a two-parent family with three kids with a gross income of $80,000 will be required to pay $1,500 more in taxes next year on account of the alternative minimum tax. A family with more than three kids can expect to pay an additional $500 per child in taxes.
The child-credit and marriage-penalty relief acts passed in 2001 will not help. Families claiming the child credit or benefiting from the marriage-penalty relief might actually pay more.
The more deductions or credits claimed the more likely the alternative minimum tax will apply. This means that married couples with many kids, a mortgage and property taxes will be hit by the alternative minimum tax regardless of the child-credit and marriage-penalty relief.
“[It] is a kind of shadow tax system, with its own rates and special deductions,” said Chris Kinnan of Citizens for a Sound Economy. “The AMT threatens to undermine [President Bush's] own income-tax cuts. Bush cut regular income-tax rates but left the shadow AMT rates the same. The result is that more people will be forced to pay the AMT, since it is the higher of the two.”
Without legislative intervention, large families will be penalized for no other reason than that they have more mouths to feed.
“Discrimination comes in many forms and from many sources, but I never thought it would come from our own federal government,” a mother of four wrote President Bill Clinton in a letter in 1999. Her family's taxes ballooned an additional $1,332.43 on account of the alternative minimum tax.
“We are paying AMT while our neighbors with similar economic income do not simply because we have four children and they have two children. If we only had two children and reported four exemptions on our tax return instead of six,” she continued, “we would not have been required to pay any AMT.”
Despite former National Taxpayer Advocate W. Val Oveson calling the alternative minimum tax “absolutely, asininely stupid,” President Clinton vetoed the 1999 bill Congress passed to repeal the alternative minimum tax.
President Bush and Congress are aware of this discrepancy caused by the alternative minimum tax but are hesitant to repeal it because it will increase the already-growing deficit.
The Tax Policy Center, a Washington think tank, estimates that a repeal of the alternative minimum tax through 2010 will deprive the U.S. Treasury of $600 billion in revenue.
“I suspect we will only tinker with it to try to reduce the number of people who are affected because it is so expensive now to repeal it,” said Rep. Jim McCrery, R-La., of the House Ways and Means Committee. “If we start running huge surpluses again in a few years there is a possibility we could repeal the AMT, but with all the other problems we are going to have … I really don't expect the outright repeal of the AMT, which is unfortunate.”
President Bush's tax cuts temporarily placed a Band-Aid on the gaping alternative minimum tax wound so that this year's taxes will not be severely affected by the alternative minimum tax (only 3.3 million taxpayers will be affected).
But unless the alternative minimum tax is repealed in the years ahead or at least adjusted for inflation, middle-income earners — especially those with large families — will begin to feel its sting as early as 2005. The Wall Street Journal calculated in a December tax report that 12.3 million filers will be affected by the alternative minimum tax in 2005, 24.6 million in 2008 and more than 31.2 million by 2010.
What can you do?
Write President Bush and your representatives in Congress. Ask them to support large families by abolishing the alternative minimum tax. Ask your elected officials to vote your values. Ask them to do away with the threat to large families posed by the alternative minimum tax.
“We need to keep it on Congress' radar screen,” advised current national taxpayer advocate Olson. It's “a time bomb with a short fuse.”
Act now or you're liable to pay for it later.
Michael N. Kelsey, the Register's proofreader, is a student at Quinnipiac University School of Law.
- April 11-17, 2004