Posted on 08/21/2005 8:11:57 PM PDT by Libloather
Is this tax trap waiting for you?
By William Neikirk Tribune senior correspondent
Sun Aug 21, 9:40 AM ET
The AMT is coming after you.
Congress passed the AMT, or alternative minimum tax, in 1969 to crack down on 155 super-rich people who had escaped paying taxes. But in the next few years, it will ensnare millions in the middle class and perhaps roil the nation's politics.
This year nearly 4 million taxpayers are being hit by the AMT, but that number will soar to 20.5 million taxpayers next year and 51.3 million, or 45 percent of all taxpayers, by 2015, according to the Treasury Department.
In the process, President Bush's tax cuts will appear less generous as the AMT bite increases.
Its critics call the AMT a stealth tax increase. And it is nothing short of a political land mine, likely to spark taxpayer anger as it reaches deeper into Americans' pocketbooks. In the past, because the alternative minimum tax disallows state and local tax deductions, it hit people in the so-called blue Democratic industrial states the hardest. In the future, residents of the "red" Republican states will become increasingly subject to the AMT, tax experts said.
"It was never intended to hit middle-income people," said Sen. Charles Grassley (R-Iowa), chairman of the Senate Finance Committee. "And now it is going to devastate the middle-income taxpayers of America if we don't repeal it."
Efforts to repeal or overhaul it are under way, but not before its tentacles touch many more people. And if it is abolished, other taxes probably will have to be raised by a 10-year total of $1.2trillion to make up for the projected lost revenue, according to the president's tax reform panel.
Gobbled up in tax bite
In 2004, the AMT took in $15 billion. By 2015, the Treasury Department says it will raise $210 billion in revenue.
The AMT's reach already has expanded well beyond its original intended targets. It came after schoolteacher and church organist Kim Palermo-Bogardus of Greenport, N.Y., in 2001 when she discovered that, after filing separately from her husband, she owed an additional $584 to the Internal Revenue Service, and then another $101 in 2002.
"I was so mad when I found out I had to pay the so-called millionaires' tax," she said.
It came after 63-year-old Darla Worton of Indianapolis after she won an age discrimination settlement from Ameritech. After seeing more than 40 percent of her settlement go to regular taxes and attorneys' fees, Worton, an office worker and part-time waitress, said her accountant shocked her by saying she owed several thousand dollars more, thanks to the AMT.
"Sometimes I wonder if I really did `win' the lawsuit," she wrote to the president's tax reform panel. "This tax is so unfair to someone like me who works three-four jobs just to have a nice life."
Originally aimed at stopping the wealthy from avoiding taxes by using too many deductions and tax shelters, the highly complex AMT requires that many taxpayers calculate their income taxes twice. First they figure their regular income tax by adding up their income and subtracting their deductions and then they do it again by using the AMT's rules. Then they pay the higher amount, which is often the AMT.
Deductions don't apply
The levy comes into play mostly for high-income people with substantial deductions, such as personal exemptions for children, state and local income taxes, property taxes and miscellaneous deductions.
Under the AMT, those deductions no longer count. After a standard AMT deduction of $58,000 for couples and $40,250 for individuals is applied, it imposes a flat 26 percent tax on income under $175,000 and a 28 percent rate over that amount.
Because neither the two tax brackets nor the exemptions are indexed for inflation, more and more people will be subject to the tax as their incomes grow over time, tax experts said. By 2011, the Treasury Department said, more Americans earning $50,000 to $100,000 will pay the tax than will taxpayers exceeding $500,000 in income.
Grassley said AMT stands for "absolutely maddening tax," and tax expert Leonard Burman of the Urban Institute compares it with a sci-fi movie creature, the Blob, capable of smothering everything. Joanna Veirs, a tax planner in Louisville, noted that the AMT works against many Bush administration goals of trying to promote families, home ownership and charities by denying deductions in those areas. In fact, Palermo-Bogardus said she has cut back on her charitable giving.
Repeal movement
Bush's tax reform panel, which will finish its report to the Treasury Department at the end of September, already has said it would like to abolish the AMT. Former Sen. Connie Mack (R-Fla.), the panel's co-chairman, said he thinks the president will follow the recommendation, though he isn't sure.
Mack called the AMT "an egregious tax" and added, "It's an indication of the unintended consequences of good intentions." And, he said, the tax should be repealed in the name of simplicity. "Having a dual tax does not meet that objective," he said.
Grassley also supported a repeal and agreed with Mack that the law has lost much of its original intent.
"Very wealthy people have found ways not only of getting out of the regular income tax, they are finding ways of getting out of the alternative minimum tax," the senator said.
Grassley and Mack disagree sharply on whether other taxes should be raised if the AMT is eliminated. Mack said he has no choice but to recommend that other taxes be increased to offset the projected revenue loss, but Grassley said he opposed such a step. That could make abolition harder to pass, he said.
"Everybody hides behind having an offset," Grassley said. "Just think of how idiotic it is to have an offset to income that was never intended to come in in the first place. It's just ridiculous. It fails the test of common sense."
But if there is no corresponding tax increase to replace the AMT, the budget deficit over the next 10 years would expand, said Burman, adding that it is "kind of reckless" not to raise other taxes to make up for any loss of AMT revenue if the tax is repealed.
Grassley said residents of the "blue" industrial states indeed are paying a greater share of AMT taxes now, because they have higher state and local taxes and higher income. "You'd think it would be a no-brainer that we'd have every Democrat voting for this," the senator said. On the committee, he said, Democratic Sens. Ron Wyden of Oregon and Max Baucus of Montana favor repeal.
If comments sent to the tax reform panel are any indication, the AMT is highly unpopular.
Dan Taylor, who lives in Flossmoor in Chicago's south suburbs, described how he and his wife were slapped with a $438,000 AMT bill after he exercised incentive stock options in 2000. At the time, his high-tech company, GeoTel, had been taken over by Cisco Systems, so he was able to buy Cisco stock cheaply through his options.
But he did not immediately sell those shares, taking the advice of a tax adviser to hold them so he could take advantage of the more favorable long-term capital gains tax. Then the stock plummeted in value when the high-tech bubble burst, and Taylor was never able to profit from his options.
AMT shock ensued
He was stunned to learn that he had such a huge tax liability from the AMT, because the law provides that the tax is to be imposed when options are exercised, not when they are sold. So he had a large "phantom" profit.
Taylor, who now works for a telecommunications company, said he is dipping into the last of his retirement savings to pay off the IRS, and he and his wife may have to sell their house. His son quit a four-year college to go to a cheaper junior college. His monthly tax bill is more than $14,000.
"What I have learned from this is that bad laws get written, and then we the people can be streamrollered by these laws," Taylor said.
- - -
AMT poses a pitfall for more taxpayers
Critics say the alternative minimum tax (AMT) is a stealth tax that, if not addressed, will force many unsuspecting taxpayers to pay more in the coming years.
ALTERNATIVE MINIMUM TAX
WHAT IS IT?
The purpose of the AMT is to prevent high-income taxpayers from paying little or no taxes by taking advantage of deductions, exemptions and other tax breaks.
HOW DOES IT WORK?
The AMT requires taxpayers to recalculate their taxes using an alternative formula that does not allow for some of the usual deductions.
HOW DO I KNOW IF I HAVE TO PAY THE AMT?
The 1040 tax form and booklet contain information and a worksheet for taxpayers to calculate whether they need to pay the AMT.
HOW IS IT CALCULATED?
Here is a hypothetical example, using a married couple with three children. The couple earned $140,000 in wages in 2004, paid $10,000 in mortgage interest and $17,000 in state and local taxes. Under the AMT, their personal exemptions and state and local tax deducations are replaced by the AMT standard exemption.
2004 REGULAR TAX 2004 AMT
Income $140,000 $140,000
Exemptions
Mortgage interest --$10,000 --$10,000
Personal (5 people x $3,100) --$15,500
State and local taxes --$17,000
AMT exemption --$58,000
Taxable income $97,500 $72,000
Tax owed* $17,850 $18,720
*Regular tax rate vs. AMT flat rate of 26 percent
Taxpayers pay the higher of the two tax amounts, in this case the AMT, which is $870 more.
WHY IS THE AMT GOING TO AFFECT MORE PEOPLE?
The AMT is not indexed to inflation, so as incomes continue to rise, more taxpayers become subject to it.
Projected tax returns subject to AMT
In millions
2005 3.8
2006 20.5
2007 23.8
2008 27.0
2009 30.3
2010 33.9
2011 37.5
2012 44.2
2013 40.8
2014 47.7
2015 51.3
Note: Chart assumes that 2001 and 2003 tax cuts do not expire after 2010 and that temporary AMT provisions are allowed to expire after 2005.
Sources: U.S. Treasury Department, Congressional Budget Office
Studies conducted by the Treasury Inspector General for Tax Administration over the past two tax filing seasons criticize the Internal Revenue Service's use of training programs.
The report came out of the Government Accountability Office on Aug. 11, having been requested by two Democrats -- Senate Finance Committee member Max Baucus, of Montana, and Sen. Byron Dorgan, of North Dakota. Both Baucus and Dorgan questioned whether the IRS knows if the new training programs are helping.
"The IRS cannot keep blindly throwing money at training without seeing the results," said Baucus, in a statement. He encouraged the IRS to develop a strategy to guarantee that the agency is using its resources to effectively improve service to taxpayers.
The report suggests that the IRS could be wasting millions of dollars on ineffective employee-training programs to assist taxpayers over the phone and at the agency's Taxpayer Assistance Centers. Although the IRS cannot separate the costs of training tax law assistors from other assistance staff, the thousands of staff devoted to providing tax law assistance receive training each year, and the report says that they could benefit from a more centralized system. The report also said that the IRS did not have data on what is likely the largest cost component -- the value of staff time devoted to tax law training.
The full report is available at www.gao.gov/new.items/d05782.pdf.
Why not just make the AMT the flat tax? That way you get a choice. You could spend all the effort it takes to file a tax return under the existing tax laws, or you could file a much simpler one under the flat tax.
You can dam well bet the illegals aren't worried about this.
PO'd about taxes?
I'm not saying Right or Wrong. (Actually, I'm saying a bit more right.)
http://www.fairtax.org/
Not because it is starting to affect more and more "middle class" taxpayers, mind you -- but because if left unchecked it will eventually destroy the housing industry.
If you can't deduct your mortgage interest and property taxes, what's the point of buying (or keeping) an overpriced home?
I've been thinking about that for some time. Why do we have to pay higher and higher taxes when all the money sent back to Mexico by these undocumented illegals is tax-free? Not to mention, of course, the money they don't send back.
IRS May Be Wasting Millions - who'da thunk it?
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