Cross your fingers and hope you’re not caught by Alternative Minimum Tax (AMT) this year.

by Paul Michael on 13 January 2008 9 comments

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It’s completely outdated and unfair, that’s what it is!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.[2]

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.

http://0040c38.netsolhost.com/tax_alternate_min_cal.html

http://www.hrblock.com/taxes/tax_calculators/index.html

http://apps.irs.gov/businesses/small/article/0,,id=150703,00.html

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.

More reading.

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.

http://www.cqpolitics.com/wmspage.cfm?parm1=5&docID=news-000002653513

http://www.marketwatch.com/news/story/taxing-times----jan-11/story.aspx?guid=%7B39ABF672-8880-4E41-BD1F-1CE56BB5063B%7D

http://www.tahoebonanza.com/article/20080111/Business/402256825

http://www.bocaratonnews.com/news/local/007-tax-law-changes.php

http://www.charlotte.com/business/story/443860.html

http://www.businesstaxrecovery.com/us_amt_taxes_calculator

http://en.wikipedia.org/wiki/Alternative_Minimum_Tax

http://farmweek.ilfb.org/viewdocument.asp?did=11162&r=0.5870478

http://www.fairmark.com/amt/amt101.htm

 

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Guest's picture
B

Here in Spain paying arround 26% is really usual. The higher income clases pay up to 43%. There are very little deductions and the first 25.683$ pays 24%. From this amount you pay 28%.

If you earn 75.000$is considered rich or at least that you have a very nice wage. In the old days there where types up to 50%. So may be things can improve.

Xin Lu's picture
Xin Lu

I think what annoys me the most about the AMT is just that you have to file in two separate systems and each year you never know what to pay.  Also, it penalizes people who have many children and high state taxes and that just doesn't seem very fair.

Guest's picture
Kathryn

If your household makes $75,000, you're in the top 20% of all households in the USA. How is that "just barely scraping middle class"? Likewise, I've seen projections of the AMT situation ten years hence, and even under the worst-case scenarios, something like 1/3 of households would be affected by it ten years from now. Is that too many? Maybe. Is that "almost everybody"? No.

Maybe it's screwy. Maybe it's broken. But let me tell you, I've been in both places, and I'd rather pay a few extra bucks in taxes because my household earns $100K than to get a few extra bucks back because my household makes less than $25K and qualifies for the earned income tax credit.

Paul Michael's picture

Maybe 10 years ago it was the top 20%. Here's a table from the Congressional Budget Office (3 years old by the way, so it's gone up since then), stating clearly that the top 20% earn over $231,000 gross income. Middle income (which is not middle class by the way) starts at just under $60k. And in my opinion, anyone who has to pay a tax designed for the super-rich who IS NOT super rich is one-too-many.

Guest's picture
Kathryn

If you're looking at the percentage of households who PAY TAXES and then look at the average income for each of those quintiles, you're obviously leaving out the large percentage of households (about a quarter) who PAY NO TAXES, and getting a grossly distorted view of the "average" (vs. median) household in the top quintile (which is comprised of lot of people making a hundred grand and a few people making a hundred mil to produce that "average" of 231K).

When you look at census data for all households for that same year, nearly 30% of all households earned less than $25K, while 26% earned 75K or more. I'll admit I had probably been looking at figures for a couple of years out of date when I originally posted that 75K would put you in the top quintile. The top quintile now begins at 88K. Less then 3% of all households in the US earn more than 200K. Median income for ALL households for that year was 44K.

I think our understanding of the "average joe" should bear some relationship to what is actually average. It may seem like I'm picking nits, but the larger point is that I believe a major source of our culture's consumer woes is our inflated sense of what is normal to earn and own. This idea that if you don't have a 3000 sq ft house with 2 cars still under payments and digital cable, your middle-class membership card is in danger of being revoked.

Guest's picture
Guest

How many income-earning people are there at a given time in this country? Obviously not the whole population because 60 million folks earning around a quarter-mill is obviously junk. I'd be interested to find out.

75 is a really comfortable middle class for two parents, two kids anywhere I've lived. But I haven't spent considerable amounts of time in a big city. Around 100k people usually.

rstlne's picture
rstlne

I've seen that table before. The figures are for households, not individuals. In 2005, there were roughly 114.5 million households so the top 20% would be roughly 23 million households. Also, households with negative income were excluded.

Paul Michael's picture

For the sake of clarity, I've never said this was individual income, I have always used the term "household" in the article. Second, the article is not about whether you can get by on $75k a year, clearly you can. This is about what's fair and not fair. A tax put into place to catch the top 1% of household incomes should not be levied aginst 30-40% of the population. It's as unfair as announcing, tomorrow, that the government will double the taxation rate for anyone earning less than $50k per year. Or equally, doubling it for those earning $1million or more. This whole issue is about a tax system that has not been linked to inflation, thus every year it takes money from more and more households who were never intended to be taxed.

Guest's picture
Justin

We make over $75K and have not been hit by the AMT. There's something more to it than just your income, it's also linked to your deductions.