Read it and weep.
Posted on 02/22/2005 1:20:10 AM PST by neverdem
The valuable federal tax deductions that people receive for paying local and state taxes have quietly started to vanish for many households, raising the cost of living in places like New York, Massachusetts and California, already among the nation's most expensive.
The culprit is a once-obscure federal tax provision known as the alternative minimum tax, which was created in 1969 to ensure that a relatively small number of wealthy people did not use loopholes to avoid paying taxes.
But it is increasingly being applied to families with incomes of $75,000 to $250,000 a year who claim relatively high deductions - like the ones for property taxes, state and local income taxes - and the exemption for children. When it does apply, it cancels some of those deductions.
The impact is about to mushroom. Barring a change in the law, almost 19 million taxpayers will be subject next year to the alternative minimum tax, or A.M.T., up from roughly 3.4 million this year and 1.3 million in 2000, according to the Tax Policy Center, a Washington research group whose calculations on this issue are widely accepted.
The shrinking of the deduction for local taxes for millions more families in the next few years has the potential to cool price increases in thriving real estate markets, particularly in the Northeast and on the West Coast.
About half the people paying the alternative minimum tax in recent years live in one of four states - California, Massachusetts, New Jersey and New York - accounting for almost a quarter of the nation's population.
"If you're just talking about a rank-and-file working couple, they're getting hit in these towns," said Timothy F. Allen, a tax preparer in Belmont, Mass., about many of the middle- to upper-middle-class two-income families he serves in the Boston suburbs. "It grabbed me in 2004, and I was kind of surprised."
The A.M.T. 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.
The taxes that people pay to their local and state governments become a deduction in the standard federal system but not in the alternative one. The higher those deductions, the more likely a household is to fall into the A.M.T.
A commission appointed by President Bush to make recommendations for overhauling the tax system met Wednesday in Washington for the first time, with a deadline of July 31 to issue a report, meaning there will not be a change before this year's deadline for filing 2004 taxes.
While many powerful members of Congress have called for a change, the administration's proposed budget did not offer one. Almost any plan to ease the tax without raising other taxes would cost the Treasury hundreds of billions of dollars in revenue over the next decade, worsening the federal budget deficit.
Some tax experts say the relative simplicity of the A.M.T. offers a good model for tax reform. The problem, people of almost all political viewpoints say, is the combination of the A.M.T. and the regular federal income tax.
"It makes the system completely opaque," said Pamela F. Olson, an assistant Treasury secretary for tax policy in Mr. Bush's first term and now a partner at the law firm of Skadden, Arps, Slate, Meagher & Flom. "People have no idea what their taxes are going to be, and it takes back things we put in the code."
The interplay between local taxes and the A.M.T. has in effect become a face-off between two forces that many economists consider unsustainable: the rising federal budget deficit and the continuing leaps in home prices. Left unchanged, the alternative tax would produce more revenue by 2009 than the ordinary federal income tax, according to the Tax Policy Center, a joint venture of the Brookings Institution and the Urban Institute.
"It's an enormous issue," said Connie Mack, a former Republican senator from Florida who heads the commission Mr. Bush appointed to study tax reform, "and one we're clearly going to take a look at."
If the tax remains, living in many localities will become more expensive, potentially curtailing the growth in home values that has been a major boon to the economy recently. It could also create pressure to cut property taxes, the major source of public education funding in many communities.
Without a change in the A.M.T., 30 million taxpayers are likely to face it five years from now, many of them concentrated in high-tax states.
"Taxes do affect the market," said Raymond G. Russolillo, who oversees tax-consulting services at U.S. Trust in New York. "I suspect it will affect behavior at some point."
Michael Levin, 52, is an anesthesiologist in Manhattan, married, with a daughter in high school and a son in college. He does not use tax shelters or take big deductions from investments, he said. But his income, while not outsize by New York standards, is relatively high and he owns a condominium in the West Village section of Manhattan. As a result, he fell into the A.M.T. last year, costing him almost $5,000 in additional taxes.
"When I first heard about it," Dr. Levin said, "my understanding was that the concept was to prevent fat cats from not paying any taxes. Well, that's fair. Everybody should pay something. But it's killing the middle class as well."
The alternative minimum tax began in 1969, after Joseph W. Barr, the departing Treasury secretary under President Lyndon B. Johnson, told Congress that 155 wealthy families had used loopholes to avoid paying any federal income tax in 1967. Mr. Barr warned of the possibility of a middle-class taxpayer revolt in response.
Congress, deluged with letters, created the tax soon after, and President Richard M. Nixon signed it into law. When Congress overhauled the tax code in 1986, it changed the provision so that it no longer offered tax breaks for local taxes, among other things.
Today, it exempts a standard amount of income - as much as $58,000 for a married couple this year - and allows further deductions for mortgage interest and contributions to charity. It then taxes nearly all other income at a flat rate of at least 26 percent.
Though the calculation usually remains hidden, tax-preparation software figures out both the regular income tax and the alternative one for all households, and they must pay whichever is higher. The surcharge for the tax appears on a single line - Line 43 - of the Form 1040.
The triggers for the alternative tax have not kept up with inflation, causing it to capture many people whose main deductions come from nothing more exotic than children and local taxes. People in towns with high property taxes sometimes face the A.M.T., while others with similar incomes in the next town do not.
The average property tax in Belmont, Mass., for example, will exceed $7,500 this year. In Arlington, the next town north, the average is $4,500.
In parts of Fairfield County, Conn., homeowners pay $10,000, said Alan J. Clavette, an accountant there. In Montclair, N.J. - a town with many New York commuters, in the state with the highest per-capita property taxes in the nation - the typical bill is about $12,000.
Over all, people from Connecticut, New York and New Jersey have the highest average deductions for local taxes, which are mainly property taxes and state and local income taxes, according to the Internal Revenue Service. Local taxes have risen in recent years, as both property values and local tax rates have increased.
Consider a married couple with three children, living in Massachusetts and making $100,000 a year. With a typical-size home equity loan and $9,000 in property taxes, the couple would face an A.M.T. surcharge of almost $700, increasing their federal tax bill to nearly $11,000, from $10,300, according to Ernst & Young. A similar couple paying significantly less in property taxes would not fall under the alternative tax.
The tax falls hardest on states that are overwhelmingly Democratic, including Connecticut, Maryland and Oregon. Some Dermocrats say the uneven effect is one reason that the provision has not yet been changed.
"The Republican majority may not be acting on it because they see it as a red state-blue state issue," Representative Carolyn B. Maloney, a New York Democrat, said. "But it is really a middle-class issue, and the middle class is everywhere."
Republicans said that Congress, under their leadership, had created temporary fixes - including one for 2005 - that reduced the number of people subject to the extra tax. They said they expected to devise a long-term solution by overhauling the tax code in the next two years.
The A.M.T. is just one of many factors influencing the housing market; the effect of mortgage rates and the ups and downs of the economy certainly outweigh it in importance. But specialists foresee taxes becoming a more prominent factor in real estate markets as the alternative tax affects many more homeowners.
"It's not until people sit in front of their Quicken program and find out that in fact some of their deductions have been in a sense disallowed that they might come to understand this issue," said Eric S. Belsky, executive director of the Joint Center for Housing Studies at Harvard University. "As it does affect more and more people, there is an argument that it will have some influence on people's willingness to take on mortgage debt and pay property taxes."
Many of the families who have already been hit by the A.M.T. make enough money that its cost is not a hardship. Barring a change, though, the tax will cover more than half of all households with incomes of $75,000 to $100,000 five years from now, the Tax Policy Center forecasts. Nearly all families who have children and make more than $100,000 would fall into it. Many would lose some or all the tax cuts they have received since President Bush took office.
Of course, many also live in houses that are worth much more than they were a few years ago. Someone who sold a home and moved to a less expensive one would easily make up for any additional taxes they had paid as a result of the alternative minimum tax.
But extracting the value from a home is not easy. To make a significant gain, a homeowner often must move to a much cheaper region or a far smaller house.
Carlo and Chris Marano bought their home in Danbury, Conn., for $265,000 in 1992. After its value had more than doubled, they put it up for sale a year ago and looked into moving. Their three children are grown, Ms. Marano said, and "we have significant space we don't need."
But the Maranos - he is self-employed, helping design employee benefit plans, and she works for an accounting firm - could not find any house around Danbury that they wanted and that was inexpensive enough to make a move seem worthwhile.
So they stayed put, and they paid the A.M.T.
Read it and weep.
bookmarking for later study
.... :)
Oh great. Thanks for making my day.
Regards,
Screwed (once again) in New Jersey.
So let me get this straight, real estate taxes are too high in the Demo states and this is the fed's problem because they're Republican?
Do what I did...move. You know its bad when Maryland is lower than New Jersey.
ping for later
Good article. The ATM could indeed be a spearpoint for tax reform in the long term. It is ironic, however, that the states which seem to use taxation as a 'cure-all' the most are also the most impacted by it. The middle class may be shrinking, but there is certainly many people far more financially viable than in the past. I suppose it could be conversely stated that the ATM was formulated to take effect with the level of prosperity many now enjoy in mind. The loss of the local and state deductions will have a ripple effect on the tax-ability of those jurisdictions if the ATM remains unchanged. I happily came to the south eight years ago, and I AIN'T GOIN' North to live again...
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John Linder in the House(HR25) & Saxby Chambliss Senate(S25), offer a comprehensive bill to kill all income and SS/Medicare payroll taxes outright, and provide a IRS free replacement in the form of a retail sales tax:
H.R.25,S.25
A bill to promote freedom, fairness, and economic opportunity by repealing the income tax and other taxes, abolishing the Internal Revenue Service, and enacting a national retail sales tax to be administered primarily by the States.Refer for additional information:
Thanks for the AMT ping geez. Man we gotta handle this tax thing!
"The average property tax in Belmont, Mass., for example, will exceed $7,500 this year."
$600 a month property tax? Yikes!
AMT also catches people who have large families.
In Klaasen v. Commissioner, 76 T.C.M. 20 (10th Cir. 1999),
petitioners, husband and wife who were members of a religious sect that taught "the production of many offspring is a blessing" claimed 12 exemptions( 10 kids, 2 rabbits, er, um, parents) on their 1994 tax return. Shortly before trial, their 11th child was born.
Held: AMT applicable.
Court also concluded that the AMT did not unconstitutionally inhibit the taxpayers' free exercise of religion.
ANOTHER REASON TO SUPPORT THE FAIRTAX!!!
"The average property tax in Belmont, Mass., for example, will exceed $7,500 this year."
$600 a month property tax? Yikes!"
I pay $13,000 in NJ. Notice how Blue states have this problem.
"Read it and weep."
The AMT is just one of many, many, many, many illogical, inefficient, counter-productive and unfair aspects of the current tax regime. If one were to write a book cataloguing all these different ridiculous aspects, it would be far longer than "War and Peace" and much more difficult to read.
It is time to put this 90+ year failed experiment with taxing income behind us and return to the wisdom of the founding fathers. It is time to stop penalizing US producers and giving foreign producers an advantage over them in the world-wide market.
It is time to pass the FairTax - sooner rather than later.
But CG, "ALTERNATIVE MINIMUM" sounds so much less than "FAIR"!?!
SUPPORT THE FAIR TAX!
I gotta say this is some pretty complicated stuff. Too complicated and very stupid. All those in favor of scraping the existing code say AYE!
Let your elected reps know how you feel!
Join the effort by calling 1-800-FAIRTAX. Tell 'em you want to join!
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