Cross your fingers and hope you’re not caught by Alternative Minimum Tax (AMT) this year.
If you don’t know what the AMT is, you may well be in for a shock this year. And if your household income is around $75,000 or more, gross, then AMT could very well take a big bite out of you. Read on…
So, what is AMT?
It’s completely outdated and unfair, that’s what it is! Sorry, had to get that in there. Anyway, here’s the best description I could find for Alternative Minimum Tax:
The AMT was introduced by the Tax Reform Act of 1969, and became operative in 1970. It was intended to target 155 high-income households that had been eligible for so many tax benefits that they owed little or no income tax under the tax code of the time.
The AMT disallows many deductions and exemptions allowable in computing "regular" tax liability. The AMT sets a minimum tax rate of either 26% or 28% (depending on the amount of the taxpayer's "alternative minimum taxable income," as adjusted) on some taxpayers so that they cannot use certain types of deductions to lower their tax. By contrast, the rate for a corporation is 20%. Affected taxpayers are those who have what are known as "tax preference items". These include long-term capital gains, accelerated depreciation, certain medical expenses, percentage depletion, certain tax-exempt income, certain credits, personal exemptions, and the standard deduction.
Basically, you calculate your taxes in the regular way, then using the rules for AMT. Whichever you owe more tax on, that’s the one you pay! And in a time when the housing market is crashing faster than a six-year old after a sugar binge, this is terrible news. The one thing home-owners could count on was the tax benefits of ownership. With AMT, that can be called into question.
It’s not linked to inflation. Good for government, bad for us.
Did you notice that only 155 households paid the tax in 1970? Not many, right. IN actuality, about 19,000 households were hit, a negligible part of the population in fact. But unlike other forms of taxation, this one is not linked to inflation. $75k in 1970 was a handsome income. Today, it’s barely scraping middle-class. And that means MILLIONS of households are paying this tax today.
We can’t fix it…we need the money!
President Bush put a temporary patch on AMT this year, so that millions more people won’t get hit by the tax. But it’s a duct tape solution. Don’t get me wrong, this is not a Republican or Democrat issue, AMT has been a growing problem for decades. But the sad fact is that although it’s fundamentally wrong and broken, the government can’t do much about it because they rely on the many billions of extra dollars in revenue that AMT brings in. It’s a little like saying “look, we know it’s wrong to steal but we really need the cash.” The AMT was never meant to be a burden on the middle class, it was designed to catch the wealthy people who were evading tax with deductions. Of course, the wealthy these days can still afford clever tax accountants who bend the rules and get around AMT. It’s now the average Joe’s that are feeling the pinch, once again.
What can I do about it?
Not much. But you can prepare yourself for it. If your gross income is around $75,000, and you write-off a large number of personal exemptions, medical bills, taxes, home-equity loan interest and other such deductions, you’re in the firing line. The same goes if you have stock options, own your own small business (however small) or own rental properties. If you know your income is roughly $100,000 or more, chances are you’re going to get stung.
Here’s are some links to a few calculators that can help you out. Please note, the 2007 patch may not have been applied yet.
You may want to hold off on filing your taxes.
As I mentioned earlier, the 2007 AMT patch was passed only in December and the IRS is still trying to catch up. I usually file in February but I’m waiting until the end of March this year. I want to make doubly-sure that any relief I could get is in the system and my accountant knows it inside-out before I file.
I’m just touching the tip of the iceberg. Here are some more sources for AMT. Now may be a good time to look around and find a good accountant. But I’m afraid there’s no getting around AMT. And unless something is done about it, almost everyone will be paying it in about 10 years time. Still, there’s an election on the horizon and if enough of us make a stink, it could be a hot potato for the candidates to juggle.