Oh, I had a couple of interested comments on my AMT rant and so I figured I'd do a post. You've probably seen all the articles and know a little bit about it. ??? But I'll try to explain a lot what I don't see in the articles.

Yes AMT (Alternative Minimum Tax) was a tax made in the late 60s to circumvent the wealthy from taking tax shelters. IT was never indexed for inflation and has been hitting the upper middle class hard for many years. IT's making it's way down to the middle middle class. (Soon enough the lower middle class). It would affect millions more people but every year, or at least the last decade, they push a "quick one-year fix" through Congress so it doesn't hit the middle middle too much. OR else people would start screaming.

Congress has not done away with AMT because it brings in so many revenues. I have read in 2008 that AMT revenues will be higher than regular tax revenues, to the government. (Considering no quick fix). There are varying statistics out there. But everyone can agree that AMT makes a large part of the federal budget.

If you don't think it could affect you:

"Under current law, AMT coverage will skyrocket. By 2010, the AMT will affect 33 million taxpayers—about one-third of all tax returns—up from 1 million in 1999. This would make the AMT almost as common as the mortgage interest deduction is today. The AMT will be the de facto tax system for households with income between $100,000 and $500,000, 93 percent of whom will face the tax. It will encroach dramatically on the middle class, affecting 37 percent of households with income between $50,000 and $75,000 and 73 percent of households with income between $75,000 and $100,000 (compared to less than 3 percent for each group in 2002)."

From:

http://www.brookings.edu/opinions/2004/0121federalbudget_bur...

I mentioned in my last rant that AMT was is all smoke and mirrors. Well, it makes the Bush cuts all smoke and mirrors. The reason is that with AMT, you calculate regular tax, and you calculate tax under the AMT system. & then you pay the HIGHER tax. A big reason so many people are getting pushed into AMT is because of the Bush cuts. Their taxes have been lowered so much that AMT is of course the higher tax, and they are paying that instead. So the middle class taxpayers who love the tax cuts, are rather misguided. Only to be blindsided by this "stealth tax" soon enough.

The regular tax system is based on a tired tax system. Your first x amount of dollars are taxed at 10%, then 15%, then 25%. The AMT on the other hand, is a higher flat tax. So though little of your income would be subject to AMT, it would all be taxed at a high flat rate, and more than likely would be more than your regular tax would have been pre-Bush. So you think you get these wonderful tax cuts, and the stealth tax moves in. AMT wouldn't be such an issue otherwise. Though it would be eventually with inflation...

Anyway, that is why we are squarely in the 15% tax bracket and brushing up against AMT. It's a weird juxtaposition. But our regular tax would be more than AMT if not for all the tax cuts. & then we wouldn't be in AMT. So it's just weird that way.

Likewise, with the tax cuts, the government is pulling in less regular tax anyway. So they are becoming more dependent on AMT. It's a really vicious cycle.

Beyond all that, the system is unfavorable to states like CA & NY. I'll add NJ to the list. (There are probably more states largely affected, but these just come to mind). The reason is twofold. First, these states have an extremely HCOL. So incomes are higher to reflect that. Higher income means more AMT. (Though the higher income means squat compared to cheaper areas of the country. But these states have always had that disadvantage in the federal tax code to an extent). Most of our clients have been in AMT for the last 5 years. Income $200k-$500k. That is clearly upper middle for the area. Not upper class by a long shot. I am sure in many states $200k would be more upper class. So it is all relative. But the other side of the problem is high state taxes. These states have high income taxes and high property taxes. & AMT completely disallows the deduction for state taxes. So it really leaves people in these states screwed. Under AMT, if you make a mere $100k, the government does not care that you paid $9k income taxes and $10k property taxes. No state tax deduction. Double tax.

Oh one more thing, if you make more than $500k you won't get hit by AMT. If you are squarely upper class, then no AMT. If nothing else, the point is that AMT is no longer affecting the truly wealthy in the least. For the many wealthy people in this country making over $500k income, their tax shelters are not covered by AMT any longer. They get to keep their tax shelters while the middle class is losing their state tax deductions.

That's the long and the short of it.

In my next entry I'll do a quick tax calc to illustrate the AMT.

Oh, one more thing. Off the top of my head, one thing that is not affected by AMT if retirement plan contributions. So a good tax strategy to avoid AMT is to put what you can into retirement. 401ks in particular.