Falling Into Alternative Minimum Trouble

[UpInArms]

http://www.washingtonpost.com/wp-dyn/articles/A36988-2004Mar6.html

excerpt:

And you don't have to be rich, or even what we like to call "upper middle class." The IRS taxpayer advocate recently noted that the number of taxpayers with taxable income of less than $50,000 with an AMT bill in 2001 was virtually identical to the number of those with taxable income between $475,000 and $500,000.

For my family, this all added up to a tax theater of the bizarre. We owed $700 in AMT levies for tax year 2002, but our income had actually fallen in 2003, with my wife's decision to work part time. Refinancing had lowered our mortgage-interest deduction, so we figured the AMT would not be a problem. We figured wrong, in large part because the 2003 tax cut had dipped us further into AMT territory.

Sintetos said he had a similar experience. His tax return this year was "very vanilla," he said -- no accounting shenanigans, just deductions for his charitable donations, his property taxes and his Maryland income tax. His AMT hit: $1,200.

"When you look at my return, you think, 'Wait a minute. This was supposed to hit people that are taking advantage of tax havens. You're talking to Joe Citizen and now he's fallen in.' "

The greatest irony is that the truly rich do not pay the AMT, Sintetos noted. That may be because their effective tax rate is well above the AMT's 26 percent threshold, but not necessarily. Last year's tax cut lowered the tax rates on most capital gains and dividends to 15 percent, and taxes paid on investments are not subject to the AMT test. That means the country club set, living on the 18th hole and off their investments, are paying effective federal tax rates that rival those of the man clipping the green for $25,000 a year.

...more...

[slackmaster]

1. AMT is a good idea but its implementation has a major flaw

I haven't looked at the WP article and don't feel like registering at the moment.

The problem with the AMT is it was never indexed for inflation.

I almost got hit with it two years ago. Came very, very close. My tax guy saved me by helping find more deductions.

[AP]

2. If there were an AMT on CORPORATE income, the feds wouldn't be looking

to the middle class to make up the shortfall in tax revenues.

And, by the way, this is how the government transfers wealth from people who work for a living to people who live off unearned income. This is welfare for the super rich.

[54anickel]

3. Seems the most common deductions won't help (local prop & income tax)

from the article:

The reasons for Washington's woes are simple, accountants say: high taxes and escalating real estate values. Taxpayers are allowed to deduct taxes paid to state and local governments from their ordinary income taxes but not from their alternative minimum tax.

For Maryland and District households, high local income taxes alone may be enough. For the entire region, Northern Virginia included, property taxes combined with state income taxes may do the trick. Rapidly appreciating housing values have sent those taxes soaring. The pain of property taxes was once mitigated by their federal income tax deductibility. Now, it may just be another AMT trap, Auerbach said.

In short, two-income homeowners with high local taxes are now AMT bait.

[UpInArms]

5. registration is not required at the WP eom

[54anickel]

6. I got hit with the same registration page on a second try to pull up

the article. Seems one time they want it, the next they don't.
Might be something up with that website. :shrug:

[UpInArms]

7. here's an alternative

www.bugmenot.com

[54anickel]

9. Thanks! Great little tool since I tend to need to delete cookies a lot

lately - messing with my graphics for some reason.

[ramapo]

11. Reagan's gift to the middle class

The AMT goes back to the late Johnson/early Nixon era. The idea was to prevent the rich from avoiding taxes. It hasn't worked out.

Reagan (along with the Republican Senate and Demo House) did two things that have resulted in the AMT becoming a drain on the middle class.

Reagan's 1986 tax overhaul brought the top rate down to 28% by doing away with some tax shelters and making more types of income taxable. The overhaul was required to be revenue neutral but they came up a billion dollars short. The Republicans refused to increase the top rate to 29% since that would impact the rich.

So they tinkered with the AMT by adding to the list of deductions that would trigger the tax. Here's what they added to the list of "tax shelters": You, your spouse, your children, medical bills, and even the standard deduction for people who do not itemize.

Then they refused to index for inflation. Why? Because this inaction held down the cost of the Reagan tax cuts. The loss of revenue from the tax cuts to the rich would be hidden by the increase in taxes on the middle class from the AMT.

Bush II of course has done nothing to fix this since he has only added to the inequality of tax burden.

The AMT has an especially significant burden on large families, more children mean more deductions hence the AMT will reduce the value of those deductions.

Surprisingly these facts are never mentioned as the Republicans are held up as the champions of the family and middle class.

[indepat]

4. And that country club set aren't burdened with a social security tax

(which is also subject to income tax) on each marginal dollar of income earned as is than man clipping the green, so that $25,000 man is sending far more of his marginal dollars to Uncle Sam and will likely see his promised future social security benefits slashed.

[papau]

8. So those that pay less than 26% get hit is the problem - no - the problem

is the structure of the AMT -

current the deduction removal for large families can put you in AMT.

The solution is to tax the rich more and leave the AMT adjustments to capital gain rates, wierd investment, and non-taxable income being made taxable.

The AMT $450 billion Bush wants for "fix" just makes the rich screwing the middleclass problem worse.

[wjittermoss]

10. Why our candidates don't use charts to explaine this is beyond me

Most people are not unable to understand this issue once it is explained in clear simple terms with a few examples. And most people need to have explained to them what is meant by "capital gains" income and taxes. Once you tell them it is "unearned income" from the sale of stocks, bonds, property etc. and that it is income that no one has to "work" for, they will understand. The fact that one pays lower taxes on "unearned income" than on income that is worked for is very understandable and should make people angry enough to stop falling for the conservative propaganda. But few is any Dem spokespeople take the time to explain this. What I really love about the Clinton, especially Bill, was that every speech he gave was a true learning experience for those who bothered to listen. I sure miss that.

[ramapo]

12. Unearned income now subject to low rates except.....

for the little bit of interest that the average person who can't buy stocks and bonds gets from their paltry savings accounts.

Savings income used to be exempt up to I believe $400. That encouraged savings. Reagan did away with that exemption while lowering taxes for the wealthy.

I'd be fine with lower rates on capital gains up to a limit. That would help out the small investor while taxing unearned income at a rate more comparable to that paid by people who actually work.

[ramapo]

13. Read "Perfectly Legal"

This book exposes the mainly Republican tax cut scams that have provided a big boost to the very rich while throwing crumbs (at best) to the middle class. These scams were perpetrated by the Reagan and Bush II admins with cover from the Democrats who were too scared at being branded pro-tax by the Republican propaganda machine.

It'll simply make you mad as hell...