Right now it gets a lot of coverage because “It was originally intended to keep the rich from not paying any taxes. But now with inflation it means that the upper middle class also has to pay taxes.”
What’s so bad about saying that at some point you’ve been sheltering so much income that you’re no longer paying your fair share, and some sort of minimum must be maintained.
Because it’s hitting people who aren’t sheltering anything. My wife and I will probably qualify for it next year. We don’t own any stock aside from what’s in our 401k’s, send our kids to public school, live in a 2000 sq. ft. condo, and both drive late model cars. I wouldn’t know a tax shelter if it came up and bit me on the ass.
Don’t get me wrong … I’m not saying we’re poor. We live pretty decently. But we’re a long, long way from the sort of wealth that the AMT was intended to tax.
For an individual taxpayer, here are the main deductions that create the AMT liability:
- State and local income taxes
- State and local property taxes
- Interest paid on your mortgage
- Personal and dependency exemptions
High cost states (CA and NY) and large families tend to drive this. A family of four in LA with a newly purchased house could easily end up in the AMT at about $ 100,000 in income. This comes from losing four exemptions, a large mortage interest deduction and fairly high income and property taxes. I doubt most people would really see these activities as “shelters.”
There’s nothing wrong with the AMT except that it hasn’t been fixed for inflation and increasing prices and taxes. If they fix all that, it’d be fine.
Even if one accepts the premise behind the AMT, it’s still equivalent to slapping on a duct tape patch. Better to simply fix the standard tax system.
I know that strange things happen if you have stock options and the companies stock falls. You can end up owing more tax that actual income that you had in a year. The basic idea is not a bad one, but it has not been adjusted for inflation and some situation were evidently not anticipated can happen to really put people in impossible situations. It needs to be tweaked at least. Unfortunately laws seldom get tweaked so that they make better sense.
Anything that makes the tax code more complex will have a cost.
This one is - let’s see, crazy? It’s only made necessary by the fact that so many things are given special exemptions that they had to have some way of taxing the folks who could afford tax lawyers and accountants to come up with truly ingenious ways of avoiding so much tax that they wound up paying less, as a percentage of their income, than the average middle-class Joe.
Bush has, of course, never proposed indexing this to inflation because it doesn’t affect his base, for whom this is mostly irrelevant as these days they usually wind up paying enough that the AMT doesn’t affect them. It’s a politicians’ dream, because it milks money from the areas that produce the most wealth in a very efficient way: see the second map on this page, which shows that New York, New Jersey and Connecticut taxpayers are hardest hit, which is just another way of saying that the richest city in the nation, New York, is getting milked dry by this tax. California is up there too, and that would reflect the wealth concentrated in Los Angeles, San Fran, and the Silicon Valley.
If they get rid of this or modify it in some way, they’ll just wind up having to replace it with something equally efficient. You don’t think those Midwestern corn and soybean farmers, Southern cotton and sugar producers, and Texas cattle-ranchers and oilmen are going to pay, do you, even though what they produce are commodities with very little value added, in other words, stuff that increases our competitive position vis-a-vis the world not at all? To ask the question is to answer it.
Yeah, that provision is a stinker, especially for us here in Silicon Valley. And that provision has nothing to do with inflation. Basically if you exercise certain stock options, you owe tax as if you had already sold the stock. Most of us who’ve been hit by this can only pay the tax by selling at least some of the stock. And if you gamble (as many people did) that the stock will continue to rise, and you wait too long to sell it, you may owe more tax than the stock is worth. You can eventually get the tax money back, but not until you do sell the stock, and you may not want to do that.
The other problem is once you’re hit with the AMT, you can’t ever get out from under it. You’re stuck with paying it, even in future years.
The other thing is that lots of people don’t know about it, then they get hit with it out of the blue. Theoretically, **everyone **is supposed to do their taxes the regular way and the AMT way, and then pay the larger tax bill.
Er cite? I would think that AMT could apply in some years and not in others. See the worksheet of line 44 of the 2004 1040: maybe I’m blind (no I’m not: I checked line 38a), but I can’t find a reference to prior or future years. ???
… or rather I didn’t check line 38a. :smack:
I’m confused. What are you guys talking about? I don’t even see a line 38a on the 1040, just a 38. What am I missing?
Kind of important, since I fell into the AMT last year, and so this becomes a question for me this year.
:o
That was a lame attempt at a joke. The blind check a box on line 38, then fill out a number in box “38a”. That was in 2004. In 2005, it will probably be a different line, but it’s the same idea.
Sorry, no cite, that’s what I heard on a news report about the AMT. They said once you “qualify” you can’t get “unqualified” again. I thought it was a bit odd myself. What happens if your financial circumstances change for the worse, such as the death of a spouse or a job loss? I may have misunderstood.
No, that’s wrong. In fact, some people might wish they could qualify forever, since AMT is sometimes lower than the standard tax. You have to pay AMT whenever that calculation produces a higher tax bill than the standard method. And, there’s state AMT, too, at least here in CA.
You might get stuck in AMT for what **seems **like forever if you, like me, rack up a significant AMT credit one year, and can’t get it back until you make another large financial transaction.
In any given year, you will pay the higher of the liability for regular income tax or the alternative minimum tax (AMT). To the extent you are paying the AMT, the amount of tax you are paying in excess of the regular tax can be used as a credit against the regular tax in future years.
Some examples:
You do the options thing and bet wrong - In year one, your regular tax liability is $20,000 but the AMT is $100,000. You pay $100,000. The $80,000 increment can be carried forward and use to lower your taxes in future years. In year two, your regular tax liability is $20,000 but the AMT liability is $15,000. In this case you can use $5,000 of the $80,000 increment to lower your tax bill from $20,000 to $15,000. You have used $5,000 and have $75,000 of the credit remaining. In year three, you might use $4,000 of the credit and have $71,000 remaining. You’ll continue this situation until you fully utilize that credit.
You are a family of four in LA living in a newly purchased home. In that case you could be in the situation where your regular tax is $20,000 but your AMT is $22,000 year in and year out. In this situation, your AMT credit keeps building until you have some change (move to Iowa, retire etc). Then you begin using it.
Once you are using the system, you probably will continue using it for a while. The people that really get hit with it will probably keep using it for quite some time.
The credit aspect is a big part of the reason it is so hard to fix in congress. If you abolish the system, both of the taxpayers in my examples could easily gripe that they have all these credits and should be able to recoup them. Congress can either refund the net amount of AMT collected or reneg on the credit system. It will be either very expensive or very unpopular.
Holy crap. I had no idea about that. I guess I would have found out this coming year, should I slide underneath it this time around.
That is just one hell of a ticking time bomb. Think about it: boomers like myself, in our peak earnings years, are probably racking these credits up now, while we work. Then we retire, our income declines, we pay regular tax, AND we start getting these credits. Our tax liability craters.
Has anyone modelled this possibility into the future revenue stream of the Feds?
Ooops. I need to backtrack.
The LA family of four would probably not be able to utilize the AMT credit against future regular tax as the person with options would. The AMT credit excludes the amount of AMT generated by certain adjustments. The deductions for the family of four would not generate the credit but the stock options exercised would generate the credit.
This thing really is a compliance mess.