"Fixing" the AMT

This is really easy. The AMT was designed to keep high income people from reducing their income tax excessively via tax shelters. It does work. But the system designed many years ago was improperly structured retain fairness as inflation eroded its exemption.

How large should the exemption be? To be "fair" and not "double tax" working people's incomes, the size of the exemption should be equal to the amount of income subject to social security taxes. This prevents income taxed under Social Security from being taxed again under AMT. For a single person receiving a salary, the exemption would be $97,500 or their salary, whichever is less. For a two-earner couple, it would be double that, or their combined salaries, whichever is less. Self-employment income would be treated the same as salaries, as would ANY income subject to Social Security taxation. This would be very fair and eliminate almost many, many persons from AMT. There would be no exemption phase out.

The current exemption for a single person is $42,500. For a joint return it is $62,550. So this would prevent large numbers of persons from being unfairly taxed by the AMT. And it would be fair, since their income subject to Social Security tax would never be taxed under AMT.

So how does the government make up for the lost tax revenues?

Easy. "Some" municipal bonds are subject to AMT - these are called "AMT bonds". ALL municipal bonds should be subject to AMT. This would bring a huge amount of income into the system, and prevent the truly WEALTHY from getting a free ride for all Federal government services. I'll write more about these free-loaders later. But you can see how much more fair my idea is for fixing the AMT than any being considered in Washington.

For persons with NO self-employment income, such as a retiree, a minimum exemption would be necessary, such are the old limit of $40,000. Or it could simply be the starting level for the current 25% tax bracket [for 2007, this is $31,850 for singles, and 63,700 for joint returns ] . This would increase revenues some, too, subjecting people, with large incomes not from employment for a little more AMT than the current system.

Overall, this solution to the AMT "problem" would increase fairness by equalizing taxation of different types of income.

PS: I do, and have done, my own taxes every year since I started having to file a return in the early 1970s. I also do my Mother's tax return and some returns for corporations & partnerships I manage or own. I fill out the forms by hand. So I have a lot of practical experience in how the income tax system operates in reality.