Could someone explain the AMT?

[chuckw951]

Over the past year or two I've been reading about the Alternative Minimum tax and how it will apply to more middle class taxpayers. I did some googling and still don't understand how the system works and more importantly if the wife and I will have to pay the AMT in 2006. We have good incomes, pay state/local taxes and take the mortgage interest deduction. My understanding is that after a certain income level you loose those deductions and are subject to the AMT. But I don't understand how the AMT is applied and when. If we get nailed by the AMT it might make more sense for my wife not to work and stay home.
I found this report on a congressional website and I'm still trying to make sense of it.

Present Law And Background Relating To The Individual Alternative Minimum Tax
http://www.house.gov/jct/x-37-05.pdf

[chuckw951]

So am I reading this right...individuals/couples that make between $100K and $200K could get a big tax increase in 2006?

[widebody911]

http://www.nytimes.com/2005/09/24/business/24tax.html

Over the next 10 years, Americans will not receive nearly $750 billion in tax cuts sponsored by President Bush because the cuts will be offset by the alternative minimum tax, a new report by Congressional tax specialists shows.

The report, prepared by the staff of the Congressional Joint Committee on Taxation, said that from 2006 to 2015, Americans would pay as much as $1.1 trillion more under the alternative minimum tax, partly as a result of the Bush tax cuts.

The Bush tax cuts reduced the bill for millions of taxpayers to a level that will subject them to the alternative minimum tax instead of the standard tax rate. As a result, the report said, their tax savings would be reduced by a total of $739.2 billion over the 10 years.

Congress has passed a modest adjustment to the alternative minimum tax to allow more taxpayers to take advantage of the Bush tax cuts, but that expires at the year-end.

Even if it is extended, the report said, the alternative minimum tax would take away $628.5 million in tax savings, with $416.5 billion of that attributable to the Bush tax cuts over the 10 years.

George K. Yin, the joint committee's chief of staff, wrote that the Bush tax cuts of 2001 and 2003 account for just under two-thirds of the increase in collections under the alternative tax. The report was prepared in response to a request from John Buckley, chief tax lawyer for Democrats on the House Ways and Means Committee.

Families with children who own their homes will be hit hardest by the increased alternative tax.

The Treasury Department said the "administration is as concerned as anyone about the growth of the A.M.T. and its effect on taxpayers" and that it supported the temporary adjustment.

The alternative tax is a "priority to be addressed by the President's Advisory Panel for Federal Tax Reform for the long term," said Taylor Griffin, a Treasury spokesman.

Republican tax specialists said Mr. Yin's report was accurate, but created a misleading impression. Mark A. Prater, chief tax lawyer for Republicans on the Senate Finance Committee, said the root problem was not the tax cuts, but failure to index the alternative tax for inflation.

Mr. Prater also cited testimony by several tax specialists about inflation, including Leonard E. Burman, co-director of the Tax Policy Center. But Mr. Burman, in an interview yesterday, said that the design of the Bush tax cuts, not inflation, was the major reason the alternative tax produced more revenue after 2001.

The tax was initially enacted in 1969 to ensure that people making the equivalent of $1 million in today's dollars or more could not live tax-free. Because of changes in the law over the years, however, those making more than $1 million will pay little of the increased minimum tax, according to the Tax Policy Center. The original alternative minimum tax in 1969 limited the use of exotic tax deductions, like the oil depletion allowance.

But since then, Congress has moved to allow those exotic deductions, denying individuals their personal exemptions, deductions for state and local taxes and interest on home equity loans not used for home improvements. Some families are forced to pay the alternative tax even if they take only the standard deduction. Some medical bills also cannot be deducted under the alternative tax, forcing the seriously sick or injured to pay higher income taxes. Since early 1999, more than 100 members of Congress have publicly attacked the provision that raises the tax bills of the severely sick - so far without any effect.

[chuckw951]

Thanks Thom I read that article too.

[competentone]

Originally posted by chuckw951
We have good incomes, pay state/local taxes and take the mortgage interest deduction. My understanding is that after a certain income level you loose those deductions and are subject to the AMT. But I don't understand how the AMT is applied and when.

The AMT isn't simple, and I am not any tax professional, but my understanding of the tax is that you only have to start worrying about it when you have higher levels of "investment" income (like interest and dividend income and capital gains).

Whether or not the AMT applies to you depends upon ratios of your earned vs. "investment" income. Generally, for a couple married and filing jointly, you are going to need investment income/capital gains near the $300k range before the AMT becomes an issue.

The best thing to do, is to talk with a tax professional before selling any large asset or investment position that will likely result in your paying substantial capital gains taxes. Also be aware of the possible tax implications, and the effect on your income, involved in receiving/exercising any stock options you might receive from your employer. These two areas -- large asset sales and stock options -- are probably the most common way middle income earners are "surprised" by the alternative minimum tax.

Anyone more knowledgeable on the AMT, please feel free to correct any errors/omissions in my comments.

[RallyJon]

please feel free to correct any errors/omissions in my comments

OK. I got hit by it last year with less than $20k in dividend income and well under $300k in total income. Normal sized mortgage, about $10k in charitables, etc.--nothing out of the ordinary. It sucks since it throws all your withholding and planning out the window. You have to run your taxes both ways to find out. There's no other way to predict.

As the AMT affects more and more people (including just about everyone who gives a dime to any political candidate) I'm confident it will get resolved in the next couple of years.

[304065]

Here is a good article.

http://www.smartmoney.com/tax/filing/index.cfm?story=amt

If you even THINK you're headed for AMT bizarro-land, you should consult a qualified tax practitioner.

AMT is the poster child for progressivism gone bad-- Congress enacts it as a tool to chastise the high income taxpayer and ends up spanking Mr. and Mrs. North America with it!

[competentone]

Originally posted by RallyJon
OK. I got hit by it last year with less than $20k in dividend income and well under $300k in total income.

Are you married? Were you filing jointly? If you were near $150k in income and filing individually -- depending on the sources of that income -- I could see you getting hit with the AMT.

You may not want to post the details of your situation, but are you clear about exactly what income caused you to owe the AMT? Maybe your tax preparer made an error?

The way the tax was originally structured, it was supposed to "hit" those with low "earned incomes" but with higher "investment" incomes, so I don't see how $20k in dividend income (assuming this is all your investment income) would trigger the AMT.

[chuckw951]

Thanks for those replies. Sometimes I think they write the tax code this way on purpose so that the ordinary guy has to consult with a tax professional or at least use tax software to figure all of this out.

[RallyJon]

Well, I was barely over--it only added about $1k to my liability. We do have relatively high local and property taxes, which get added back. Married, but no kids. We ended up deferring some bad investment writeoffs to 2006, or it would have been worse.

I really have no complaints about the net tax bill. What pisses me off is that you have two parallel sets of incentives that you have to juggle for tax planning. So they want to incent you to postpone deductions?

[RallyJon]

So that top table says 18 million people will be affected by it next year?

There you go--any presidential candidate that can win by 18 million votes can come out against AMT reform.

[ErVikingo]

(sing this in your best Alice Cooper tone) "welcome to my nightmare..."

[chuckw951]

Originally posted by RallyJon
There you go--any presidential candidate that can win by 18 million votes can come out against AMT reform.

Well I think the rubber will meet the road before then--mid term congressional elections.

I think in the next election I'm going to vote anti-incumbent across the ticket. All of these politicians are too comfortable.

[legion]

Originally posted by chuckw951
I think in the next election I'm going to vote anti-incumbent across the ticket. All of these politicians are too comfortable.

Here! Here!

Now that's an idea and I agree 100%.

[Dan Mc Intyre]

Originally posted by chuckw951
Well I think the rubber will meet the road before then--mid term congressional elections.

I think in the next election I'm going to vote anti-incumbent across the ticket. All of these politicians are too comfortable.

Hey, now there is a great idea!

[red-beard]

The reality:

The AMT is an "Alternative" Tax system. You should always calculate both your tax liability under both the standard system and the AMT system. You are required to pay the higher of the 2.

The problem:

AMT, unlike the standard tax system, is not indexed for inflation. So, the tax brackets are adjusted by about 3% a year right now, so that you are not thrown into a higher bracket do to inflation alone. Unfortunately, the AMT brackets are fixed, not indexed. So a system designed to catch people with high income and large amounts of deductions and "MAKE THEM PAY THIER FAIR SHARE", is now catching "ORDINARY" people.

Just remember this. EVERY tax was originally designed to tax high income people, but usually was adjusted purposively or through neglect, until it maximizes the amount of taxes collected.

Can AMT be fixed? Sure. Congress and the President can pass a law to index the AMT brackets. Why don't they? The country needs the money. Personally, the AMT is a "Fairer" tax, since it minimizes deductions and it flatter. It might be better if we just abolish the regular tax code and "Fix" the AMT.

[HardDrive]

AMT sucks.

There are these islands.....called the Cayman islands.....they have banks....and the men and women that work at these banks.....they are......discrete.....

[ErVikingo]

I say get rid of death taxes, income taxes, amt and just use a higher sales tax that way you can control what you really do with your $$$.

Why not a tax credit for those of who use private schools for our family? I (like many of us) pay much more than my fair share in property taxes and do not use the schools.

Heck, I'll even take the current system if they'd only let me deduct my mortgage interest, my property taxes and my medical expenses.