Alternative Minimum Tax, Anyone?

[jyl]

What's the best way to learn about AMT (Alternative Minimum Tax)? Any good online tax calculators?

I just started getting touched by AMT last year, and am pretty concerned for 2006. I need to figure out how much this is going to affect my taxes.

Are folks here in the AMT? Has the impact been surprising, any way to plan for/minimize liability?

[ken_xman]

you need to create more taxable income ... to offset AMT.
Do you have mostly tax free income currently?

[jyl]

No, I'm all taxable, was a renter last year, was really surprised to be touched by AMT. Only a little touch, but this year I'll make more and (fingers x-d) will have a mortage deduction for 1/2 the year, so am fearing being touched a lot harder by AMT. Basically I'm concerned that I don't know how to estimate my tax liability, and thus am trying to find a good calculator. TurboTax hasn't come out w/ 2006 yet.

[Eric H]

Are you sure about that, Wayne? My understanding from my tax guy is that you still get to deduct interest on your (first) mortgage under AMT. This page seems to say the same thing:

http://www.turbotax.com/articles/FAQontheAlternativeMinimumTax.html

[jyl]

Urrgh - don't give me a heart attack, Wayne.

No, "I think" under AMT you still deduct interest on a traditional home purchase mortgage.

"I think" AMT disallows deduction for home equity loan if used for other than home improvement (so people who have been using their homes to pay off credit card debt or fund lifestyle spending get screwed). Not sure about how second homes are treated. "I think" property taxes are no longer deductible.

I keep saying "I think" because, well, I'm learning about this as we go along.

[Hugh R]

Wayne's right. Over $150K adjusted gross (if I recall) you do another calculation and pay the higher tax. It gets rid of a lot of deductions to make sure that your "Paying your fair share". What a load of crap! I already pay more taxes than the average American grosses, and I'm not paying enough. I couldn't get any grants for my daughters college, because I make too much, but I still get to pay her tuition, and some other guy's kids tuition in the form of my taxes going to PELL grants and such. F them all.

[on-ramp]

Originally posted by Hugh R
Wayne's right. Over $150K adjusted gross (if I recall) you do another calculation and pay the higher tax. It gets rid of a lot of deductions to make sure that your "Paying your fair share". What a load of crap! I already pay more taxes than the average American grosses, and I'm not paying enough. I couldn't get any grants for my daughters college, because I make too much, but I still get to pay her tuition, and some other guy's kids tuition in the form of my taxes going to PELL grants and such. F them all.

how do you suppose they will fund the $500+ billion dollar way in Iraq? war is good business for Corporate America.

it seems money is always flowing from hard-working American's pockets into corporations...F' them all is correct. they are the worst crooks. worst than the Mafia.

[Moses]

Wayne is right. Adios mortgage deduction and property tax deduction.

Presumably, AMT was designed to secure taxes from "fat cats" with lots of passive, non-taxable income. I don't have any unearned income that I'm aware of. Not one dime. I always paid my full rate with no tax loopholes or non-taxable income. I paid SO FREAKING MUCH in taxes I expected them to name a freeway after me. How was I rewarded for throwing my money wildly at the government coffers?

The AMT...

[jyl]

Well, this is thoroughly confusing. Wayne and Moses, were are you getting your info about the AMT?

Everything I've been reading in the past 24 hours says that interest on a mortgage used to buy, build or improve a house remains deductible under the AMT. Including if the mortgage has been refinanced multiple times. Where you lose the deduction is for a home equity loan that has been used for something other than buying, building or improving the mortgaged home - for example, to pay for a car, credit card debts, etc. I am still not positive how mortgages on second homes are treated, but that's not my concern. I think, but have not conclusively verified, that both first and second mortgages on your house are treated the same - e.g. if you did 80-10-10 financing.

Here's some links, I picked only the ones from CPAs or other tax professionals, as I'm not convinced the popular media or internet bloggers are reliable on this one.

Looks like I'll have to buy Turbotax and run some scenarios, to get comfortable with the answer.

http://www.wipfli.com/Wipfli/Impact_Magazine/Services/Tax/AMTthreat.htm

Watch mortgage interest. The single largest itemized deduction on most taxpayers' returns is the one for mortgage interest expense. AMT does not disallow most of the deduction for mortgage interest, but the rules are different. What AMT does not allow are deductions for interest on loans not used to buy, build or substantially improve a first or second home. That means that interest on home equity lines of credit (HELOCs) may not be deductible under the AMT.

http://www.fpanet.org/journal/articles/2005_Issues/jfp0205-art8.cfm

http://www.aicpa.org/PUBS/jofa/apr2006/ftta.htm

The only mortgage interest eligible for AMT purposes is from a mortgage whose proceeds were actually used to build, buy or substantially improve a taxpayer’s main or second home. If a taxpayer has taken a home-equity loan and used the proceeds to pay off credit card debt, go on vacation or buy a new car, the interest is not deductible for AMT purposes.

[Sonic dB]

Yup.... over $150K and it doesnt matter how much you deduct...they still nail you with the AMT. Its just plain old wrong, imo. The law was enacted in 1969 as a way to offset the rich being able to deduct their way down to 0. Unfortunately it has been modified and directed as just another tax in disguise. I hate it

[techweenie]

The AMT is a stealth tax increase that affects more and more taxpayers every year.

The politicians get to crow about 'holding the line' or 'rolling back taxes' while the AMT does their dirty work for them.

[Don Plumley]

Paying a lot in taxes is ultimately a good thing - it means you are making a lot of money. Yes, deduct every penny you can and reduce the tax bill to the letter of the law. But then sit back and pat yourself on the back for having a good year.

This is the only way I keep my sanity after years of AMT...

[Porsche-O-Phile]

Renting sounds better and better each day. . .

[Rick Lee]

I think the AMT was instituted because of something like 140 (may have been even fewer) taxpayers who were very wealthy and got away with zero fed. tax liability one year. You can imagine the demagoguery that must have gone on in that debate.

[lendaddy]

Originally posted by Rick Lee
I think the AMT was instituted because of something like 140 (may have been even fewer) taxpayers who were very wealthy and got away with zero fed. tax liability one year. You can imagine the demagoguery that must have gone on in that debate.

Remember that Cheers episode where Sam bet Dianne's rich boyfriend a months salary on chess match? Anyway, Sam and the boys rigged up a ear piece and fed Sam the perfect computer moves and he actually won. Then the rich boyfriend informed Sam of his after deduction salary of $1 and payed him

Why do I remember this crap?

[legion]

Originally posted by Rick Lee
I think the AMT was instituted because of something like 140 (may have been even fewer) taxpayers who were very wealthy and got away with zero fed. tax liability one year. You can imagine the demagoguery that must have gone on in that debate.

Was one of them a Kennedy?

From what I understand, they have managed to swing an effective tax rate in the single-digits.

[Rick Lee]

Legion, you're right. I have read several accounts of how Ted Kennedy pays so little in taxes. As much as I hate the guy, I can't fault him for taking advantage of every loophole he can. I'd do the same. Our tax code is so beyond repair and I don't think it will change. Fixing it would take too much power out of the hands of the politicians for them to reward their supporters.

[legion]

Originally posted by Rick Lee
I can't fault him for taking advantage of every loophole he can.

I can fault him. He has the power to create "loopholes".

[fintstone]

Take it from me, the AMT is a real killer. It is just as Wayne posted. Just bend over and enjoy how the "rich" are being punished. This is a pretty general, but informative article:

Alternative Minimum Tax 101
The AMT is meant for the rich, but it's the scourge of the middle class. Here's why.
November 10, 2005: 9:33 AM EST
By Katie Benner, CNN/Money staff writer
NEW YORK (CNN/Money) - Maybe you've managed to ignore the recent spate of tax-reform stories, but that doesn't mean you'll dodge the Alternative Minimum Tax or its higher tax bite.
The AMT system comes with a completely different set of rates and deduction rules. People pay it only if their AMT tax amount is higher than their traditional taxes. Translation: if you're paying the AMT, you are by definition paying higher taxes.
The system created to make sure the uber-rich didn't dodge the tax bullet is under fire because it's now affecting middle-class Americans. And reforming it could mean increased tax payments for everyone.
The problem? What defined uber-rich in 1969, when the AMT was first enacted, has never been adjusted for inflation. That means what made you affluent back then doesn't now -- but you're still taxed like it does.
The Urban-Brookings Tax Policy Center says the AMT will hit 3.6 million out of the nation's 131 million taxpayers filing for tax year 2005 (filed in early 2006), and could affect 31 million by 2010 if nothing is done.
To give you a sense of just who might get caught, this year only 1.8 percent of married couples with two kids and an adjusted gross income between $75,000 and $100,000 will be subject to AMT. Next year, that number jumps to 73.4 percent.
A tale of two systems
Under the regular IRS rules, you start with your gross income and subtract deductions like state taxes you paid, and exemptions like child credits. Eventually, you arrive at your taxable income.
Under AMT rules, you still start with your gross income, but many of the usual deductions and exemptions are disallowed. Suddenly, your taxable income is a lot higher.
Even though some deductions still stand, including those for mortgage-interest and charitable donations, some key breaks are lost. They include:
• state and local income taxes and property taxes
• unreimbursed business expenses
• child-tax credits
• tax-preparation fees
• legal fees
• home-equity loan interest
Even though the highest tax rate under the AMT -- 28 percent -- is lower than that in the regular tax system -- 35 percent -- AMT victims are paying more because they're paying on a greater amount of taxable income.
Short of moving to a low-tax state like, say, Texas, said Len Burman, co-director of the Tax Policy Center, there's not a lot you can do to avoid AMT's clutches.
Exemptions and phase-outs
In trying to determine tax liability under AMT, you do get to exempt a certain amount of income from your calculations.
The problem is that the exemptions granted under the AMT have not kept pace with inflation -- while the average paycheck has. For instance, in 1982, the exemption for married couples filing joint was $40,000. Adjusted for inflation, that would be $82,000 today.
Currently, the exemptions are only $58,000 for married couples filing jointly and $40,250 for singles. And they would be even lower if Congress every year did not vote through a "patch."
Really high earners may not even get the full exemption since it is phased out above certain income levels.
The phase-out for married couples filing jointly begins at $150,000 (after the deductions that are allowable). The deduction shrinks by 25 cents for every dollar earned above that amount until finally, at $382,000, there is no exemption at all.
Who gets burned?
By law, everyone who files taxes is obligated to figure out whether they have to pay AMT, and they are prompted to do so on line 44 of Form 1040.
There, taxpayers are referred to the AMT worksheet. If the taxable income on the worksheet is higher than the taxable income on the 1040, you are subject to AMT and must fill out the special AMT Form 6251.
But the 12-line worksheet and Form 6251 can be daunting, and 75 percent of AMT payers hire a professional to do their returns, according to the President's Advisory Panel on Federal Tax Reform.
"The first time most people hear about the Alternative Minimum Tax is when they get a letter from the IRS saying that they still owe money," said the Tax Policy Center's Burman.
So how do you know if you'll be one of the unlucky?
If your total deductions and exemptions under the normal tax code come close to the AMT exemption, you want to be on the lookout for the AMT, said Tom Ochsenschlager, vice president of taxation with the American Institute of Certified Public Accountants.
Also be on the lookout if your adjusted gross income changes dramatically because of:
• a lot of itemized deductions
• high local and state tax deductions
• child exemptions
• a mortgage deduction
Then it may be time to get some professional help or some good tax software.

[jyl]

I must say, I still don't understand why I got touched by AMT for 2005. My income is volatile, swings +100% and -50% from year to year are common, last year was one of those -50% years, and the dollar level was not very impressive at all. I was very surprised to be honored with AMT.