Democrats are considering extending the minimum tax rates that some high earners will have to pay, a move that would help offset their benefits from a proposed expansion of the federal deduction from local and state taxes, according to a person familiar with the negotiations.
An expansion of the Alternative Minimum Tax, or AMT, would force some of the top earners to pay more taxes even though they are eligible for a long list of credits and deductions, the person said. The idea of ââexpanding the scope of the AMT comes as House Democrats rally around a proposal to make the SALT deduction unlimited for five years – a big hiatus for some of America’s most wealthy, even given some of the tax increases elsewhere in President Joe Biden’s economic program. .
The Washington Post earlier reported Democrats’ interest in the AMT to help balance an extension or repeal of the $ 10,000 SALT deduction cap.
The AMT is a tax determination parallel to the standard tax system and requires some high-income Americans to calculate their federal taxes twice. Taxpayers pay AMT – either 26% or 28% – if they have too many tax credits and formula deductions. The highest marginal income rate in the standard tax system is 37%.
SALT deductions are not allowed in calculating AMT, while other tax benefits, such as mortgage interest deductions and medical expenses, are capped.
Interest in a minimum levy on top earners comes as Democrats face criticism that their plans to suspend the SALT deduction would benefit some of the wealthiest Americans.
Senator Bernie Sanders, an independent from Vermont who speaks with Democrats, said on Tuesday he could not support a proposal to make the SALT deduction unlimited until 2025 because it would give billionaires too much tax relief. Slim majorities in the Senate mean any member could block the tax and spending bill the Democrats are chopping up.
Sanders said he could only support unlimited SALT deductions for those earning less than $ 400,000 per year.
The AMT was significantly reduced in the Republican tax law of 2017, resulting in the subjecting of around 200,000 taxpayers to the AMT in 2018, up from 5.1 million before the law was passed, according to the Urban-Brookings Tax Policy Center. This law also capped SALT deductions at $ 10,000, which meant that fewer taxpayers were subject to AMT because they were eligible for less tax relief.
An expansion of the AMT coupled with an uncapped SALT deduction could mean millions of taxpayers would end up paying the AMT and therefore lose SALT deductions.
In fact, many upper-middle-class taxpayers who were unhappy with the $ 10,000 limit on SALT imposed by the 2017 law never even claimed this deduction, thanks to AMT rules, according to the analysis. from Bloomberg News.
Democrats have grown increasingly interested in minimum levies in recent weeks, especially after Senator Kyrsten Sinema told colleagues she could not support increases in marginal tax rates.
Biden’s framework for the bill includes a minimum corporate tax of 15% on financial statement profits as well as a minimum 15% levy on profits of overseas companies. Senator Joe Manchin, a Democrat from West Virginia, also launched his own version of an AMT which he calls a “patriotic tax.” This would apply a rate of 15% to high net worth individuals who can benefit from numerous tax breaks.
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