01/06/2010
Alternative Minimum Tax (AMT) is a “growing problem” for our clients. What was intended to be a snare for a handful of very wealthy taxpayers back in 1969 has become a stealthy way for the federal government to collect more money from a growing percentage of upper-middle income taxpayers. Congress habitually “fixes” AMT one year at a time to tweak it a tad, but no one seems to have the political will to take on AMT and abolish it. Why? Because a lot of money is collected WITHOUT “raising tax rates” – read my lips, no new taxes and/or reduction of individual tax rates – but what is the point of “no tax increases” if AMT is not cured? All administrations/congresses since 1969 have been collecting money under AMT, and in the past decade (ala Bush and now Obama), an ever increasing percentage of taxpayers are being slammed with AMT. AMT, simply put, allows our government (Republicans and Democrats alike) to increase the tax collected from more and more American taxpayers. The fact is that the politicians have been “under taxing” us for years but covertly collecting the additional needed from upper-middle income taxpayers via the AMT. All of you who have paid AMT in the past 10 years know what I’m talking about. And more of you will pay it in the future. By the way, AMT is basically a flat and unindexed tax—at 28% plus. And we still have trillions of dollars of debt, so anyone who thinks the US can do what it does for a flat 10% or even the touted 17% tax….think again.
Here are the AMT exemptions for 2009 (what you can deduct from your AMT income which is figured differently from your “taxable income”). If your AMT income for 2009 is below these amounts, you will not be affected by AMT:
Married Filing Jointly $70,950
Single/Head of Household $46,700
Married Filing Separately $35,475
So how is AMT income determined? You start with adjusted gross income. Then you subtract your itemized deductions which have been adjusted with AMT rules. You may have to add other items of income that would not otherwise be taxable in the current year. You do not get to subtract your personal exemptions – thus, large families are particularly hard hit. Here is a very abridged list of common AMT triggers.
• Medical Expenses: for AMT, you may deduct only the excess of 10% of adjusted gross income. On your regular tax return, you deduct the excess of 7.5%. So, for AMT, you lose some of your medical deductions.
• Taxes: The concept of deducting state and local taxes (including state income and property taxes) stems from “no double taxation.” In 1986 (who was president?), AMT was amended to deny a deduction for taxes – so for AMT, you are being taxed on taxes paid to state and local governments. Does that seem like double taxation to you?
• Large Capital Gains and Dividends. While not a direct trigger, capital gains and dividends are included in AMT income and if you have had a major gain, that sends your overall income into the $150K and up range, AMT could be triggered thus impacting your overall taxes…and minimizing your 15% cap gains/divs benefits.
• Investment Expenses. These are IRA advisory fees, money management fees, tax preparation etc and are deductible when they exceed 2% of your adjusted gross income. However, they are NOT deductible at all for AMT.
• Home Equity Interest. If you use your HELOC for a vacation or a car or to invest in the stock market, the interest is NOT deductible for AMT. You must document how you are using the HELOC money to defend yourself in event of an audit.
• Oil and Gas Investments. For regular tax, you can deduct percentage depletion, but for AMT you can only deduct cost depletion – if you are an oil and gas investor, you understand the nightmare of THAT statement. Intangible Drilling Costs can be deducted in year incurred for regular tax, but for AMT, it is a 60 month amortization.
Those are just a few of the differences between regular tax and AMT. If you would like a very detailed but easy to read treatise, check out http://www.cbo.gov/doc.cfm?index=5386&type=0 which is from the Congressional Budget Office. It was published in 2004, so some info is out of date, but overall, it will give you a good flavor of AMT including pros/cons and those supporting various positions.
In fairness, some of the items above are considered “timing” differences – that is, for regular tax you get an accelerated deduction. But for AMT, the deduction is meted out over years, generating a credit that you may or may not be able to take advantage of on future tax returns. That means, pay all the tax now and perhaps pay less later.
Bottom line – since 1969, Presidents and Congresses who have stated blatantly that overall taxes have been reduced have not been telling the whole truth, since more and more Americans are impacted by AMT every year (remember, it is not indexed and $70K income in 1969 versus $70K income in 2009 are apples and oranges). They critisize the AMT but do not fix it. If we want it fixed, we have to be prepared for the uncomfortable reality that our current “regular” indexed tax may fall quite short of the needs to run American as it is.