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Author: arrete Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 748923  
Subject: AMT Date: 1/19/2007 4:08 PM
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Alternative minimum tax is about turn ugly if Congress doesn't do something.

The AMT is a parallel tax structure created in 1969 to prevent the super-rich from using deductions and shelters to avoid paying taxes. But it was not designed to consider inflation. So a tax that hit fewer than 400,000 families in 1985 is expected to ensnare 3.8 million households at tax time in April, raising their tax bills by an average of $6,813, according to the Tax Policy Center.

Next year, the number of families affected would rise to 23 million unless the law is changed.

After Democrats won control of Congress last fall, they put fixing the AMT at the top of their agenda. The White House, too, has called for a change but has never offered specifics.
....

"I see no evidence of any politicians looking at the more painful kinds of choices we're laying out here," Berman said.

http://www.washingtonpost.com/wp-dyn/content/article/2007/01/18/AR2007011801785.html

I had no idea that the number of people affected would change so draatically in 2007. You'd think polticians would worry about things like that. <g>

arrete


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Author: synchronicity Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 326876 of 748923
Subject: Re: AMT Date: 1/19/2007 4:21 PM
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I had no idea that the number of people affected would change so draatically in 2007.

The AMT thresholds have been adjusted upward each of the last several years thanks to laws passed during each year. If no such law is passed this year, the lower threshold will remain in effect, which is why AMT would impact so many more people.

Don't be surprised to see the thresholds legislatively adjusted again this year, although with PAYGO passed this will make it more difficult.

FWIW, AMT effectively works as a something very close to a "flat tax"- one great big exemption, very few allowed deductions, and an effectively flat tax rate (26% under 175K, 28% over, and I think the great big exemption can get pahsed out over time at higher levels).

Everyone knows the answer to the AMT problem is to inflation adjust it (as it should have been long ago), but for various partisan and procedural reasons, nobody's about to do that.

-synchronicity

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Author: ravvt Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 326877 of 748923
Subject: Re: AMT Date: 1/19/2007 4:33 PM
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I had no idea that the number of people affected would change so draatically in 2007. You'd think polticians would worry about things like that. <g>

arrete


… somewhat like the pinheads who enacted this thing in the first place. To think that because a bunch of pols got their panties in a twist over 155 high income people who paid no income tax because they used allowable deductions in the tax code, we end up with millions of people getting stuck with higher tax bills…


http://en.wikipedia.org/wiki/Alternative_Minimum_Tax

The Alternative Minimum Tax (AMT) system is part of the federal income tax system in the United States. There are two AMTs, one for individuals and the other for corporations. The AMT for individuals is addressed here.

The AMT is, in effect, a parallel tax system imposed under 26 U.S.C. § 55 that disallows many deductions and exemptions allowable in computing "regular" tax liability. (Regular tax liability is defined in 26 U.S.C. § 26(b), and does not include the alternative minimum tax and various other categories of taxes imposed under Chapter 1 of Subtitle A of the Internal Revenue Code.)

The AMT was introduced by the Tax Reform Act of 1969,[1] and became operative in 1970. It was intended to target 155 high-income households that were eligible for so many tax benefits that they wound up paying little or no income tax under the tax code of the time.



P.S. For anyone who thinks that their Roth IRA or 15% cap gain taxes are etched in stone, you might consider the frequency with which the boyz in DC change the tax code...


http://en.wikipedia.org/wiki/Taxation_in_the_United_States

Tax Acts of the United States
Internal Revenue: 1861 • 1862 • 1864 • 1913 • 1916 • 1917 • 1918 • 1921 • 1924 • 1926 • 1928 • 1932 • 1935 • 1940 • 1940 • 1941 • 1942 • 1943 • 1943 • 1944 • 1945 • 1948 • 1950 • 1950 • 1951 • 1954 • 1954 • 1962 • 1964 • 1968 • 1969 • 1971 • 1975 • 1976 • 1977 • 1978 • 1981 • 1982 • 1986 • 1990 • 1993 • 1996 • 1997 • 1998 • 2001 • 2002 • 2003 • 2006




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Author: fleg9bo Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 326881 of 748923
Subject: Re: AMT Date: 1/19/2007 4:53 PM
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AMT effectively works as a something very close to a "flat tax"- one great big exemption, very few allowed deductions, and an effectively flat tax rate (26% under 175K, 28% over

Isn't it the case, however, that qualified dividends and LTCG are included in the AGI that determines whether you pay AMT or not? IOW, if you have a bunch of dividends and LTCGs, they get taxed at 15% themselves, but push regular income into the 26% bracket when it would have been at 15% otherwise?

--fleg, steeling himself for another AMT hit

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Author: arrete Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 326883 of 748923
Subject: Re: AMT Date: 1/19/2007 5:13 PM
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Isn't it the case, however, that qualified dividends and LTCG are included in the AGI that determines whether you pay AMT or not? IOW, if you have a bunch of dividends and LTCGs, they get taxed at 15% themselves, but push regular income into the 26% bracket when it would have been at 15% otherwise?
------------------------
Or 28% or 33% when you would have been 25%. That's what getting us in both 2006, but especially 2007 when DH takes his NUA lump sum. I'm not allowed to take any profits this year unless they change the code <g>. Kidding! I'll be careful, though.

Aren't the rates 10% - 15% - 25% - 28% - 33% - 35% ? (Married filing jointly).
http://www.irs.gov/formspubs/article/0,,id=150856,00.html

It's kind silly to complain, because we're doing OK. OTOH, there are people out there making big bucks, but also have huge debts. They'll get blind-sided by this tax. And they may vote.

arrete

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Author: Gingko100 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 326884 of 748923
Subject: Re: AMT Date: 1/19/2007 5:18 PM
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Every year they pass a patch to cover it "just for this year." And eventually they will need to do something. It's the elephant in the room. Everyone is painfully aware it's there but no one wants to discuss it.

I've been hit by it the past four years.

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Author: bighairymike Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 326888 of 748923
Subject: Re: AMT Date: 1/19/2007 5:46 PM
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Just jumping on here at the end of the thread. Not wishing Gingko100 or anyone else to have to pay more to Uncle Sugar.

But I must point out the mechanics of the AMT goes a long way towards what the flat tax advocates (like me) well.... advocate.

The AMT counts most income, eliminates most deductions and applys a fixed rate to the result. Easy Peasy. It seems that all is required is for the base to broaden and the rate to come down as the old tiered, deduction laden systems is slowly displaced.

Of course, this could be done in a revenue neutral way but the congress weasels will use any opportunity as cover to increase spending.... So in conclusion, it won't happen and we're screwed.


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Author: synchronicity Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 326915 of 748923
Subject: Re: AMT Date: 1/19/2007 10:14 PM
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BHM:
I must point out the mechanics of the AMT goes a long way towards what the flat tax advocates (like me) well.... advocate.

The AMT counts most income, eliminates most deductions and applys a fixed rate to the result.


Exactly. I'm always amused by people who A) are vocal proponents of a flat tax who B) raise their voices in protest at AMT. Not you, obviously, but some other people.

However, that may come about because many people (again, not you) don't understand how AMT works.

fleg:
Isn't it the case, however, that qualified dividends and LTCG are included in the AGI that determines whether you pay AMT or not? IOW, if you have a bunch of dividends and LTCGs, they get taxed at 15% themselves, but push regular income into the 26% bracket when it would have been at 15% otherwise?

Sort of. I'll explain more below.

arrete:
Or 28% or 33% when you would have been 25%. That's what getting us in both 2006, but especially 2007 when DH takes his NUA lump sum. I'm not allowed to take any profits this year unless they change the code <g>. Kidding! I'll be careful, though.

Aren't the rates 10% - 15% - 25% - 28% - 33% - 35% ?


You're confusing AMT with the regular tax.

The simple way to think about it is this: the AMT is like a totally different tax system. Imagine that you're filing another tax return, under a totally different set of rules. Those rules work roughly as follows:

1) Most stuff that is classified as "income", including a few things that might not be under the "regular" system (incentive stock options are the major stumbling block for many people, IIRC)
2) Your deductions are much more limited than under the regular system.
3) Instead of the standard deduction/most itemized deduction/personal exemptions, you get One Great Big Exemption.
4) everything above the Great Big Exemption gets taxed at a 26% up to about 175K, and above 175K it gets taxed at a 28% rate. Dividends, capital gains, stuff from REIT's, whatever. Income is income.

The Great Big Exemption gets phased out if your income is high enough, so the effective tax rate is a touch higher than 28% while that happens, (I'm too lazy to calculate exactly what the effective rate would be), but really, it's essentially "add up all your income from wherever, take a few limited deductions, subtract the Great Big Exemption from that, and tax it at 26%-28%."

For most people, the tax yielded by this system is lower than the "regular" tax. But if the tax under this system is higher, than that's your tax instead of the "regular" tax amount.

So, why has AMT become a big deal? A few reasons, not necessarily in any order:

A) most important, the Great Big Exemption wasn't inflation adjusted. For awhile it was high enough that relatively few people would have an AMT amount greater than zero. But as inflation has moved on over the years, the regulaar tax brackets got adjusted upward. In 2007 the Great Big Exemption, if not adjusted by law, will be $45,000 for Married Filing Jointly. If you have a married couple with two kids, they would have a 10.7K standard deduction in '07, plus 13.6K in personal exemptions (3.4*4), or 24.3K. That's standard deduction: itemized could be far greater.

IOW, the Great Big Exemption ain't that great anymore.

B) Reductions in tax rates. Back when the lowest two tax rates were 15% and 28%, a 26% AMT rate would take awhile to catch up to the regular system.

Now the lowest rate is 10%, followed by 15% and 25%. So the spread between AMT rates and regular rates is greater than it used to be. Combine that with the inflation adjustments up of the regular tax tables...

C) Cash out refis/house appreciation.

The most common time when people start itemizing is when they buy a home. Suddenly they have mortgage interest and property taxes to deduct, and since they're above the standard deduction they can count those state taxes, too..

That's great, but under the AMT regime, you can only deduct mortgage interest used to buy, build, or "substantially improve" your home, and can't deduct the taxes at all. For many people property taxes have jumped substantially as their home values have increased. Also, many people have taken advantage of low rates and that strong housing market to do cash out refis. While much of that mortgage interest remains deductible under the regular system, only interest applicable to the "old" mortgage is deductible under AMT (assuming that refi was not used to improve the home, but rather to buy a car or go on vacation or whatever).

So, many people who deduct up the wazoo on Schedule A find most of that not allowed for AMT. Whoops. And it just so happens that those people are often folks who are solidly "middle/upper middle" class, whose house is a substantial chunk of their net worth.

Anyway, that's why AMT is impacting more people. I'm sure there are people on this board who may be hit by AMT for other reasons, but for a lot of people, the factors above are the main drivers.

Hope that helps explain AMT for anyone needing an explanation.

-synchronnicity

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Author: synchronicity Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 326918 of 748923
Subject: Re: AMT Date: 1/19/2007 10:24 PM
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Forgot to ask: fleg, are you still helping Spanish speakers with tax returns, or am I totally confused in what you were doing awhile back?

-synchronicity

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Author: telegraph Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 326927 of 748923
Subject: Re: AMT Date: 1/19/2007 11:32 PM
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Not only that, the AMT uses your 'non-taxable' bond income to figure out how much of your deductions you will lose, essentially then taxing 'non-taxable' income. Via the back door.

t.


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Author: fleg9bo Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 326929 of 748923
Subject: Re: AMT Date: 1/20/2007 1:24 AM
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Forgot to ask: fleg, are you still helping Spanish speakers with tax returns, or am I totally confused in what you were doing awhile back?

I did that for H&R Block two years ago. I was going to do it on a volunteer basis this year, but got busy with other stuff and ended up with not enough time to do the study course at the IRS website plus the state tax training.

Next year I plan to get an earlier start on the tax course and get qualified for volunteering.

--fleg

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Author: cattleman22 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 326985 of 748923
Subject: Re: AMT Date: 1/20/2007 3:24 PM
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{{Exactly. I'm always amused by people who A) are vocal proponents of a flat tax who B) raise their voices in protest at AMT. Not you, obviously, but some other people.

However, that may come about because many people (again, not you) don't understand how AMT works.}}


I would say there is one other and bette reason why a person can both favor a flat tax and oppose the AMT as it is now. That reason is one of fairness. It is not fair for there to be multiple taxing systems. If AMT covered everyone or no one, then it would be fair. Having it cover only certain people is not fair.


c

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Author: markr33 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 327029 of 748923
Subject: Re: AMT Date: 1/20/2007 8:32 PM
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Exactly. I'm always amused by people who A) are vocal proponents of a flat tax who B) raise their voices in protest at AMT. Not you, obviously, but some other people.

I think the vocal proponents of a flat tax are proposing a "Great Big Exemption" that would cause 90% of the population to pay the flat tax, not just 10% of the population (and some of the hardcore flat tax folks propose one that would affect anyone at all with any level of income).

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