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11-10-2007, 01:39 AM
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#1 |
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 The Alternative Minimum Tax
Following up to a discussion on the Alternative Minimum Tax (a federal tax on income) starting HERE and continuing HERE and HERE (and more) this thread is for info -- and general venting -- in regards to the unfair and out-of-control AMT.
In 2006 4,000,000 US Taxpayers were hit by the AMT. Estimates put the number of affected taxpayers for 2007 as high as 25,000,000  -- That is not a typo -- YES!!! 25,000,000 !!!The House of Reps acted today ... Alternative minimum tax fix passes House CNN / AP November 9, 2007 WASHINGTON (AP) -- House Democrats on Friday pushed through an $80 billion bill to block the spread of a dreaded tax on middle-income people. The White House and Republicans, protesting tax increases in the bill affecting mainly investment fund managers, maintained that it would never become law. Negotiators are trying to come up with a compromise that would fix the Alternative Minimum Tax. The 216-193 vote to "patch" the alternative minimum tax for a year sends the issue to the Senate, where its prospects are at best uncertain. Not one House Republican voted for it. What is certain is that if Congress and the White House do not reach a compromise by the end of the year, anywhere from 21 million to 25 million middle-income taxpayers will be hit by the AMT, costing them as much as $2,000 in extra taxes. The AMT was created in 1969 to ensure that a very small number of wealthy people could not use tax breaks or deductions to avoid paying any taxes. But it was never indexed for inflation, and every year the AMT draws in more middle-income taxpayers. This year some 4 million people were subject to the tax. Congress has recently responded with annual fixes or patches to limit those affected by the tax while searching for a way to eliminate it. House Ways and Means Committee Chairman Charles Rangel, D-New York, last month outlined a plan to repeal the AMT, at a cost of $831 billion over 10 years, but acknowledged that action on his proposal is a long way off. Friday's bill would extend AMT relief for one year, at a cost of about $51 billion. It includes another $30 billion in largely popular tax relief measures, including expanding the child tax credit, providing a property tax deduction to some 30 million families and extending a tax exemption for the combat pay of military personnel. It extends several dozen targeted tax breaks due to expire at the end of the year, including a deduction for college tuition, a deduction for teachers' out-of-pocket expenses and deductions for residents of states that do not have income taxes. Others benefit winemakers, employers of Katrina victims, contributors to charities and state lawmakers. The controversies come over some $80 billion in new tax revenues required under House Democratic rules that tax cuts or spending increases be offset so that the federal deficit does not grow. The bill, said House Speaker Nancy Pelosi, will enable Congress "to plant a flag for fiscal responsibility." But anti-tax Republicans said the AMT was a mistake and thus offsets were unneeded. "What absolute lunacy," said Rep. David Dreier, R-California, "paying for a tax that was never intended." The bill would bring in $25 billion over 10 years by taxing so-called "carried interest" as ordinary income. Critics say that it is unfair that private equity managers pay the 15 percent capital gains rate on profits from fees or services instead of the ordinary income tax rate of 35 percent for high earners. Democrats argued that 23 million people in danger of getting hit by the AMT would be protected by tax changes affecting some 50,000 people earning carried interest. But changing this tax rule, as well as others affecting corporate transactions, "would undermine the competitiveness of U.S. businesses in the global economy and could have adverse effects on the U.S. economy," the White House said in a statement warning of a presidential veto if the House bill clears Congress. Some pro-business Democrats joined Republicans in expressing concern that the carried interest provision could hurt venture capital and real estate investors as well as hedge fund managers making hundreds of millions of dollars. Senate Finance Committee Chairman Max Baucus, D-Montana, plans to put together what he says will be a fiscally responsible Senate version of the AMT after the House vote, but has not committed to any specific tax raisers. Under Senate filibuster rules, Republicans have the votes to kill any bill with tax increases. "Congress can and must stop this middle class tax hike before Thanksgiving -- without raising taxes," Senate Republican leader Mitch McConnell of Kentucky said Friday. But Pelosi said that "we have an understanding with the Senate that this legislation, in order to go forward, must be paid for." "Raising revenues takes political courage," said House Majority Leader Steny Hoyer, D-Maryland. "There is no courage whatsoever in plunging our country into debt, spending and not paying." The Internal Revenue Service has warned that delays in passing an AMT fix bill, because of House-Senate differences or a presidential veto, could have immediate repercussions for next year's tax-filing season. The IRS says it is now preparing forms for next year and ambiguity about the fate of the AMT could delay processing of returns for as many as 50 million taxpayers and delay issuing of about $75 billion in refunds. The White House also said language in the bill to terminate an IRS program farming out delinquency cases to private debt collectors would subject it to a veto. Copyright 2007 The Associated Press. |
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11-10-2007, 06:42 AM
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#2 |
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Lofter, I think you're absolutely right to give this issue its due, and it's own thread. It's kind of hard to post on it right now, given the state of flux the issue is in, but I'm kind of going to assume a couple of things.
Everyone will agree that this, too, is a mess. Nothing will get done about it before the 2008 elections. If something does get passed by Congress this or next year (and can override veto), we probably won't see any affect for a year of two. Having said that, the AMT has been set up to get worse and worse for the middle to upper-middle class as time goes on. You may not have been screwed in the past, but soon you may just find that your state and local taxes alone (particularly if they have to be increased due to this economic mess) may push you into the amt Twighlight Zone. |
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11-10-2007, 06:56 AM
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#3 |
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Precisely ^
In just a few months a lot of folks are going to get a big surprise. This year could be the tipping point. If an additional 20,000,000 taxpayers find on tax day this coming April that their tax rate has unexpectedly increased by $1-2K or more then that could make the AMT a hot botton election issue. Here's some of the reasons why ... The Alternative Minimum Tax: Impending Tax Shock To Hit 19 Million Payers The Investment U e-Letter Issue # 602 November 3, 2006 by Mark Skousen, Chairman Investment U I always postpone the unpleasant filing of my federal and state income tax returns for as long as possible. For most Americans, the dreaded date is April 15, but for me, it's October 15, after I instruct my accountant to file the standard extension. This year, my accountant had some nasty news for me. I was hit hard by the dreaded "Alternative Minimum Tax," so much so that I was faced with having to pay additional taxes, interest and penalties on both my federal and state returns. It was not a pleasant event for my pocketbook. At the same time, my publisher asked me to attend a fundraising event where Vice President Dick Cheney and Senator George Allen of Virginia were appearing. I declined the invitation, telling my publisher, "Sorry, but they already have all my money via the IRS." Frankly, I'm mad as hell about the sneaky ways this spendthrift Congress raises my taxes (with the exception of incumbent Ron Paul, who is opposed to the Alternative Minimum Tax (AMT) and other unfair taxes). And now I come to find out that this obscure federal AMT is about to mushroom. According to the Tax Policy Center, next year almost 19 million taxpayers will be subject to the Alternative Minimum Tax, or AMT, up from roughly 3.4 million this year and 1.3 million in 2000. Take a look in the following chart …  So much for the Bush "tax cuts"! Basically, if you earn more than $75,000 a year (sometimes even less), you could be subject to the Alternative Minimum Tax. The AMT effectively sets up a parallel tax system for all households, in which few deductions are allowed. Taxpayers whose alternative tax is higher than their regular federal income tax must pay the alternative one. Property taxes, state and local income taxes, and the standard deduction and personal exemptions for children and dependents are normally deductible, but not in the alternative one. The higher those deductions, the more likely a household is to fall into the Alternative Minimum Tax. What's the Tax Situation If You Live in These Four States?
Bush's latest budget makes no provision for repealing or reducing the AMT. All he did was create a commission to study the matter. Fortunately, there are some loopholes to the nasty Alternative Minimum Tax… 3 Ways to Avoid the Dreaded Alternative Minimum Tax
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11-10-2007, 07:06 AM
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#4 |
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Some additional info (moe at the link) ...
Backgrounder on the Individual Alternative Minimum Tax (AMT) The Tax Foundation by Patrick Fleenor and Andrew Chamberlain Fiscal Fact No. 26 Overview Reforming the Alternative Minimum Tax (AMT) is a key issue facing the President’s Advisory Panel on Federal Tax Reform. The following brief provides an overview of the AMT and why it matters for taxpayers. The AMT is a tax system that is parallel to the regular income tax. It was originally designed to capture a small number of wealthy taxpayers who were avoiding income taxes, but the AMT’s reach has ballooned in recent years. Until recently, the AMT affected less than 1 percent of taxpayers. Since 2000 the AMT has steadily grown, hitting roughly 3 percent of taxpayers in 2005. If left unchanged, the AMT will penalize nearly 20 percent of taxpayers by 2010 —s ome 30 million Americans in total. (See Figure 1.) Figure 1. Projected Impact of the Individual Alternative Minimum Tax  Source: Congressional Budget Office. a) Calendar year basis. b) Fiscal year basis. Why Was the AMT Enacted? Congress enacted the AMT in 1969 following testimony by the Secretary of the Treasury that 155 people with adjusted gross income above $200,000 had paid zero federal income tax on their 1967 tax returns. (See Appendix for the AMT’s legislative history.) In inflation-adjusted terms, those 1967 incomes would be roughly $1.17 million in today’s dollars. This tax avoidance by a few high-income taxpayers was widely perceived as unfair. Rather than directly addressing the problem by eliminating the deductions and credits in the tax code that were leading to the tax avoidance, Congress laid an additional layer of complexity over the regular income tax in the form of the AMT. Who Is Affected by the AMT? Under the current system, taxpayers who file using the 1040 form at tax time fill out a special worksheet to determine if they pay the AMT. In addition to the worksheet, certain deductions serve as red flags that might signal suspicious tax avoidance activities, and these automatically throw taxpayers into the AMT. (See Table 1.) Essentially, taxpayers calculate their tax liability under both the regular income tax and the AMT, and then pay the higher of the two amounts. Further Resources on the AMT The following resources provide additional background on the AMT:
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11-10-2007, 07:17 AM
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#5 |
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It seems that almost NONE of the 2008 Presidential Candidates have taken any position whatsoever on the AMT ...
Take a look at the chart from the Tax Policy Center found here \/ 2008 Presidential Candidates' Tax Proposals Only Rudy Giuliani and Duncan Hunter have taken a position. Giuliani says index it for inflation; Hunter says "Make increases in the AMT exemption amounts (from Bush's 2002 tax package) permanent". The others? Who knows ... |
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11-10-2007, 07:26 AM
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#6 |
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The Alternative Minimum Tax
Assault on the Middle Class Author(s): Leonard E. Burman Other Availability: PDF | Printer-Friendly Page Posted to Web: October 29, 2007 Permanent Link: http://www.urban.org/url.cfm?ID=1001113 "Milken Institute Review" column reprinted with permission. The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders. The text below is an excerpt from the complete document. Read the full paper in PDF format. Abstract In a tax code with no shortage of ironies, the alternative minimum tax (AMT) stands out. Created by Congress in 1969, it was aimed at millionaires, but relatively few millionaires pay it. It is billed as a low-rate levy, but most of its victims face higher taxes because of it. It undermines two widely lauded reforms of the income tax—restoring both bracket creep and the marriage penalty. And though nobody favors keeping this Frankenstein alive, it will be very difficult to kill. Welcome to the tax policy twilight zone. Introduction In a tax code with no shortage of ironies, the alternative minimum tax (AMT) stands out. Created by Congress in 1969, it was aimed at millionaires, but relatively few millionaires pay it. It is billed as a low-rate levy, but most of its victims face higher taxes because of it. It undermines two widely lauded reforms of the income tax — restoring both bracket creep and the marriage penalty. And though nobody favors keeping this Frankenstein alive, it will be very difficult to kill. Welcome to tax policy in the Twilight Zone. At first glance, the AMT may seem simple and fair. But for reasons nobody imagined when it was created, the AMT bull's-eye hangs not on folks with Cayman Islands bank accounts, but on upper-middle-income families with lots of kids who happen to live in high-tax states. And it doesn’t just raise their taxes. It plagues them with mind-numbing complexity. Tax analysts have proposed a dozen ways to wring the perversities out of the present AMT law. All, however, present political challenges, and some would sharply cut revenue even as federal spending obligations begins to well with the retirement of the baby boomers. But I get ahead of myself. HOW IT WORKS The AMT is conceptually straightforward. First, you compute your regular income tax. Next, you add back some of the deductions that reduce taxable income, deduct a flat $45,000 ($33,750 for singles) and calculate the tax on the balance at rates of 26 or 28 percent. Then you compare the two figures and pay whichever is higher. But there's a big catch: the bulk of the AMT's taxable income adjustments have nothing to do with anybody's notion of loopholes, which is what the AMT was supposed to plug. The largest is the deduction for state and local income and property taxes, which accounted for 63 percent of all AMT adjustments in 2006 tax returns. Personal exemptions—the $3,300 deduction (in 2006) for each family member and dependent—accounted for another 22 percent of AMT addbacks, while miscellaneous itemized deductions like employee business expenses make up 11 percent of the total. "Milken Institute Review" column reprinted with permission. (End of excerpt. The entire article is available in PDF format.) |
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11-10-2007, 08:29 AM
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#7 |
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I'm curious if that's what's going on here - they want to keep the tax but claim republicans are the bad guys because they want to give hedge fund managers a break instead.
If that's the plan, it will be a disaster. Dems get blamed for tax increases, fair or not. There much better off cutting the AMT and dealing with revenue offsets after the 2008 election. Raising taxes now is just a way to make enemies - you raise revenues after you win election and then cut them later when confidence is restored and growth picks up. Look at Bloomberg for an example of how its done. |
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11-10-2007, 09:23 AM
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#8 |
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Democrats represent most of the upper-middle-income taxpayers mistakenly hit by the alternative minimum tax, and have been desperate to fix the problem for years.
This issue came up during the 2002 tax debate -- but Bush and the Congress delayed action on the AMT and instead gave tax breaks that benefited mostly the very rich. Fixing the AMT problem is the top tax priority for the Dems this year. Problem is, the House Democrats have also promised not to raise the deficit. So the Rangel plan that just passed (see the first post in this thread) raises taxes on wealthier investors to compensate. Those new taxes will likely draw a Republican Senate filibuster and a presidential veto. That's why the Senate is already drawing up a compromise bill. In the end, I think the House Democrats will have to fold and accept higher deficits. The AMT burden is getting too heavy for another year of inaction. |
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11-10-2007, 02:00 PM
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#9 |
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There's a great analysis in Class Matters, a book written by some NYTs people, on how Bush's tax changes (specifically his use of the AMT) will serve to shift increasing amounts of the tax burden from the truly rich to the upper-middle class. I can't put my hands on the book right now.
I may despise the move, but it's politically not such a bad ploy (in the short term, and I don't think W. can or would like to think beyond the short term), as the middle-class and below American has very little sympathy for the upper-middle class American at this point. Which makes it a tough issue for the Dems to tackle, although they know that in the long term a society can only piss off so many people for so long, while rewarding the top 1/2 of 1%. Particularly when that top echelon is driving the economy into the gutter. That's why I think they jumped on the hedge fund bandwagon. It probably won't pass, or survive veto, but it's a way to polarize the issue to make it more reasonable to the electorate. But, as you all have noted, we really don't have the money to fix any problems at this point, be it AMT, education or health care. Clinton's surplus, a very distant memory. How ironic, the let's not tax the rich and let's spend massive amounts Republicans have dug a nasty grave for our economy (helped out by the lending industry). The bottom line is that W. has done such damage, in such an uncontrolled fashion, that our grandchildren may still be dealing from the fallout from his actions. And I thought I hated Reagan. |
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11-10-2007, 08:00 PM
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#10 |
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If they just raise the top income tax rates, that would probably insulate people from the AMT. They might be upset anyway, of course, because they'd be paying higher taxes, but those higher taxes would primarily fall on the people they were intended for at least.
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11-10-2007, 08:44 PM
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#11 |
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A completely easy fix ^
But it won't happen because those 5% (or so) control almost all the capital and want to keep it in their pockets. |
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11-10-2007, 09:01 PM
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#12 |
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Actually, I think the top .5% has 45-50% of the wealth in our country (the top 1% has about 30% of the income). Wealth vs. income is important, because our current tax structure greatly rewards income from investment over earned income, particularly at the higher income levels.
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11-10-2007, 11:07 PM
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#13 |
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Our nation has a crisis with its savings rate. If you tax wealth, that will encourage people to spend, create inflation, deflate financial markets, etc. It's also double taxation in certain cases, like on dividends.
Until the country learns to save more, I think it makes sense to encourage people to invest and cut them a tax break for that. But if you just restored the Clinton tax rates, this whole problem (along with the deficit) would go away. (That was actually 1 thing I liked about Clinton - he was a deficit hawk but also realized the need for America to invest more of its money - like Greenspan said, he was actually the best free market economics "republican" president in along time. The republican line by Greenspan is obviously idealogical needling of the Bush administration for betraying economic principles - Clinton was a democrat - but his basic point that the Clinton tax scheme was good for the economy overall is right). |
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11-10-2007, 11:22 PM
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#14 |
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The Clinton tax scheme was great. It can't work anymore, in this economic scenario. Taxing wealth generated income at a higher rate than now (if you lower the amt, which would affect all other major potential INDIVIDUAL INVESTORS AND SAVERS) would be progressive and return us closer to the Clinton model.
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11-10-2007, 11:58 PM
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#15 |
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I'm inclined to think it should be viewed as ordinary income for tax purposes - sweat equity is different than having your own capital in the game.
But I think if by "wealth generated income" you mean money earned on people's own savings and investment, that I'm less comfortable with. Progressive tax isn't the only goal - we want people who are investing capital in American business and creating jobs here to feel comfortable. They could just as easily move their money to Europe if we start trying to redistribute money they've already earned. Also, a lot of wealth is tied up in corporate balance sheets. If people were forced to sell stock to pay their wealth taxes, its pretty easy to see a viscious cycle developing here. I'm not interested in soaking the rich on money they've already earned and now are investing in American business opportunities. |
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11-11-2007, 12:14 AM
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#16 |
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I agree entirely. But we've never been hesitant before to carve out exceptions in our taxation schemes. Right now capital gains tax rates are relatively (to highly) regressive for the lower to middle class tax payers.
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11-11-2007, 12:26 AM
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#17 |
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Hey investordude,
How can the average american save? I think I read recently that many middle-class families are carrying at least a couple of thousand of health care dollar debt on their backs. TVs, even flat screens, are relatively cheap. They are not the things that are going to (generally) cause bankruptcies. I worked in a soup kitchen in 1988. I'll never forget the people, and those who NEVER in a million years thought they'd have to bring their family to such an environment. |
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11-11-2007, 01:14 AM
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#18 |
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Obviously, poorer people can save less, but even upper middle class Americans don't save money. Most of those people have employer based health care, but just blow away the money on things they don't need. And when they do get money, they run up absurd credit card debts, and then get another mortage to pay them off. I had a friend in college who would go buy $1000 worth of clothing to make herself feel better whenever she felt down - and she carried $10K or so of credit card debt.
The reality is almost everywhere else in the world, the average person is MUCH poorer than America, but they don't have negative savings rates elsewhere. Go to any Asian country and you'll see my point, and even in Europe, people save much more of their income. We're a debt addicted society, and we need to do more to encourage rational savings and investment. |
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11-11-2007, 01:28 AM
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#19 |
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We're a debt addicted society ... Who benefits from that? Why is it encouraged? And where is it getting us? |
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11-11-2007, 03:10 AM
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#20 |
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And I'm not sure it's that true. I've been reading recently that our consumer spending, in actual dollars (today's tv is pretty cheap), has remained the same or decreased. Our shortfall has occurred because of the larger expenses that we couldn't even begin to control: housing and health care.
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