Posted on 02/10/2004 9:23:47 AM PST by yoe
The AMT now sideswipes 3 million taxpayers. Think you're not one of them? Better cross your fingers
Nina Olsen has been practicing tax law for nearly 30 years. These days, she's the nation's taxpayer advocate -- the in-house representative of ordinary citizens at the Internal Revenue Service. And she knows about as much as anyone about the tax code. But Olsen was stunned last spring when she finished running her return through a commercial tax-prep program. There on line 43 of her Form 1040 was an extra levy of $721. "I was just like, 'Wait a minute, how did that happen?"'
"That" was the price of the nastiest tax lurking in the code -- the alternative minimum tax. First enacted in 1969 to rope in 155 fat cats who had escaped paying taxes altogether, the AMT today reaches far beyond the superwealthy dodgers it was supposed to target. This year, more than 3 million taxpayers -- most of them middle-class and upper-middle-class couples with kids -- are going to get clobbered by the tax. True, these taxpayers have benefited greatly from lower tax rates on income, capital gains, and dividends. But many of these advantages are being eroded by a tax that's largely hidden, difficult to plan for, and perverse in its consequences.
And odds are, you could be a victim. Those W-2 wage reports and Form 1099 brokerage statements you just received could contain one of the land mines -- high state and local taxes, hefty job-related expenses, incentive stock options, or certain kinds of municipal-bond interest -- that blow unwitting victims into the AMT swamp. And if you get caught, odds are the price tag will be steep. If you are making between $100,000 and $200,000, figure on paying nearly $3,000 in extra tax.
Just how does the AMT work? Think of it as a parallel universe where you must calculate your taxes twice. First, you fill out your 1040 the regular way -- adding up total income, subtracting deductions and personal exemptions to determine taxable income, and then figuring your tax. Under the AMT, you must do the whole thing again. But this time, you are not allowed to use many valuable deductions to reduce your taxable income. You figure what's owed under the AMT, compare it to your regular tax bill, and pay the higher amount. The excess over the regular bill is, in essence, your AMT.
`IT'S HORRIBLE' The AMT went haywire because it does not take inflation into account. The regular tax adjusts brackets and personal exemptions for higher prices and income, but the AMT does not. So as incomes rise, more and more people are caught. And Bush's recent tax cuts just make matters worse. Since you must pay the higher of the two taxes, the recent changes that lower your regular tax just make it more likely you'll be paying the AMT.
If you've managed to escape the tax so far, your reprieve is almost certainly temporary. The levy is growing like the monster from the tax lagoon. By the end of this decade, barring reform, this stealth tax will strike 33 million annually -- or one-third of all taxpayers -- according to estimates by the Urban-Brookings Tax Policy Center. It will hit 9 out of 10 making between $100,000 to $500,000 in today's dollars, and more than 70% of those making $75,000 to $100,000. And it is turning the concept of a progressive tax code on its head: The very wealthy often pay a smaller share of their income in AMT taxes than the upper middle class.
Even for many middle-class families, the AMT and its devilishly complicated Form 6251 will be the tax code -- not the regular income tax on Form 1040. "The cop and the nurse with two kids are going to get nailed," says Brookings Institution tax economist William G. Gale.
Escaping the AMT isn't easy. Tax planning can't change the number of kids you have or the levies imposed by your state -- the two most common AMT tripwires. Steps you would normally take to cut your taxes, such as deferring a yearend bonus, can backfire when you're in the AMT. Planning may help those who are on the edge avoid the AMT in a particular year, but the moves must be carefully timed.
You might think that elected officials would be eager to reform a pernicious, capricious tax that adds complexity and cost. But think again. By Washington standards, the AMT is a success: In 2003, the minimum tax caught roughly 2,700 wealthy Americans who otherwise would have zeroed out their taxes. But it also caught more than 2 million others, all of whom had already paid tax. And at least 600 fat cats still managed to avoid all federal income taxes. Why? The AMT hasn't caught up with such schemes as moving income offshore or swapping assets to create tax losses.
(Excerpt) Read more at businessweek.com ...
page 94 BusinessWeek/Febuary 16, 2004
This weeks BusinessWeek..........read it.
Cute. I wonder if she wears belly shirts to work. ;O)
Where'd I put my tea?
Next to no chance.
The AMT just brings the flat tax in a slower process. In twenty years there will be just the AMT for the people, and for those who can employ an army of accountants to avoid it, a bunch of whores paying nothing.
That includes IRA deductions
Child tax credits
etc.
When we saw the $700 per month daycare, which we got no deduction for because we made too much money, the second commute expenses, the wardrobe demands, the monies pissed away to pay people to do the things around our home that we had no time to fix because we were too busy working, and the added tax burden, it was real clear.
Of course there is the risk of the one job being lost, exported, outsourced, and the family being in a crisis. That's what the gubmint is counting on! Scare both parents into working!
That's a killer. Without a monsterous mortgage, you are less likely to have enough deductions to get you past the standard limit, in my observation. It's pretty stacked against the upper middle class. I pay the IRS more than 25% of my income every year. Then there is the state, local, school, phone, road...
Everybody wants a piece of me.
At least this president met a payroll.
I would never forget those. H&R Block wouldn't either. But my mortgage interest is only a couple thousand this year and declining in a hurry.
I don't think I could ever work a regular job in the traditional sense ever again.
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