alternative-minimum-tax

Defying the White House, Representatives in the US House voted to prevent about 22 million taxpayers from being hit by the alternative minimum tax (AMT).

What?

Oh yeah, just like with any headline, there’s more.

The idea of AMT relief was originally endorsed by the GOP (such as Senator McCain). The problem with AMT relief? The $61 billion hole in the budget left behind.

To offset the hole, Deomocrats propose to raise revenue in three key areas:

1, The bill would tax the “carried interest” of private equity and hedge fund managers at ordinary income tax rates instead of the 15% capital gains rate;

2, The bill would close a loophole that Democrats say has allowed foreign-owned US firms to avoid taxes on payments to foreign parent companies as a result of tax treaty provisions; and

3, The bill would bar integrated oil companies from claiming a domestic manufacturing tax deduction and would freeze the benefit for smaller oil and gas companies. Integrated oil companies are those involved in the upstream (i.e., exploration and production) and downstream (i.e., refining, marketing, distribution and retailing) segments of the industry. Prior to 2004, oil companies were not entitled to this deduction which was estimated to cost $3.5 billion over 5 years.

House Ways and Means Committee Chair Charles Rangel (D-NY) claims that the offsets are necessary in order to prevent the deficit from getting bigger: “We’ll be able to say we didn’t borrow the money and we didn’t put this burden on our children and grandchildren.”

But the GOP and the White House see it differently, calling the offsets a “permanent tax increase.”

With the offsets in place, the bill likely won’t pass the Senate. If it does, the White House has threatened a veto.

I think we all agree that AMT relief needs to happen in some form - and not as a series of last minute patches. The question is whether there should be an accompanying revenue offset: what do you think?

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Senator McCain has - until now - included a promise to repeal the AMT in his economic plan.

However, a few days ago, he introduced the idea of a phase out, rather than a repeal. In a June 10 speech, he said, “I will also propose … a phase-out of the Alternative Minimum Tax.”

In 2007, he clearly wanted a repeal, stating, “I am committed to repealing this tax before millions of American families are forced to devote even more of their hard earned money to paying for the spending largesse in Washington.”

The phase out, as opposed to a repeal, would still benefit those middle class Americans who have become unwary victims of the AMT. Analysts, however, believe that 4 million Americans (at the highest tax brackets) would still be subject to the AMT - and that the AMT would remain on the books for a full term during a McCain presidency.

The proposed plan would, in years 2009 through 2013, impose a “patch”, much like the one currently in place, that increases with inflation each year. McCain would then index the exemption amount to inflation plus 5%. Once the exemption level for married couples reaches $143,000, the exemption would then revert to being indexed to inflation.

Why the switch on policy? Money. Eliminating the AMT, while popular, would certainly result in reduced tax revenue. The patch is estimated to cost $1.4 trillion over 10 years, while a complete repeal would cost an additional $600 billion. That hit to revenue would have to come from some where - and now is not a favorable time to be talking about increasing other taxes to offset decreased AMT revenues.

Senator McCain is certainly not alone in this conundrum. When faced with the opportunity to repeal the tax in 2007, Congress did not, instead putting a last minute “band aid package” together.

(Image: Newscom)

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Rep. Charles Rangel (D - NY) has unveiled what he calls “the mother of all tax bills.”

The result would be a sizable “re-shifting” of the current tax burden which has been heavily criticized even among the wealthy as “tilted to the rich.”

According to an analysis by the Tax Policy Center, the shift would mean that those making $500,000 or more would see an increase in their tax bills while those making less would see a reduction. The most significant reduction would affect families making between $10,000 and $20,000; those in the $100,000 to $200,000 range would also see relief, presumably because of changes to the Alternative Minimum Tax (AMT). Rangel has proposed repealing the AMT.

The Tax Policy Center estimates that 57% of tax filers (86 million households) would get a tax cut under Rangel’s bill in 2008, while 2.4% of filers (3.6 million households) would pay higher taxes.

The bill is not expected to pass (of course) but will serve as a platform for a debate on tax issues for 2008 and 2009.

Rangel has also offered a “patch” bill that would shield 21 million taxpayers from having to pay the AMT on their 2007 taxes. That bill passed the Ways and Means Committee but is expected to face stiff opposition from Republicans due to the offset measures to counter the $50 billion cost of the patch.

What do you think? Is a shift fair? Is Buffet right?

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That’s what many folks think when asked to consider whether they will be affected by the AMT (Alternative Minimum Tax). But here’s where they’re wrong: the AMT is hitting middle class America more often. We’ve even argued about it a little bit on the blog (be sure and read the comments). And the consensus is that Americans hit by the AMT - and the estimate is that 20 million taxpayers will be affected this year - are not happy.

Congress is trying to sort out some of the mess. The mess is even more complicated than usual because the temporary relief from before evaporates in 2007.

So, we know that we hate it - but what the heck is it? The AMT is a secondary tax that can increase what you would generally pay with your “normal” tax bill. It was originally implemented to prevent the wealthy from artificially reducing their tax bill through the use of so-called tax preference items. The idea was that people who had very high incomes should not be able to use certain deductions to lower their tax bill below what should be reasonably expected for a taxpayer at their income level. Well, that was the idea anyway. The reality is that certain kinds of transactions could bump you into the AMT threshold.

Here are some transactions that can trigger or be affected by the AMT:

State and Local Taxes. If you live in a high tax state (like New York or Hawaii) or a municipality with high taxes (that’s right, I’m talking about Philadelphia but also New York City and Bridgeport, CT), the good news is that you can deduct those taxes on your Schedule A if you itemize. The bad news is that it’s a tax preference item that could subject you to AMT - and you could lose the deduction.

Medical Expenses. You can itemize these expenses on your Schedule A. AMT limits this deduction. So, if you have high medical expense deductions, such as self-employed persons who buy their own health care insurance, you can lose out on significant deductions.

Miscellaneous Itemized Deductions. See Medical Expenses above. It’s the same problem.

Incentive Stock Options. ISOs are the number one item that I’ve seen kicking folks into the AMT. Before the mid-90s, only the really wealthy exercised stock options. But that all changed once the market went nuts and companies started going public like crazy. Suddenly, folks who were making a little bit of money but exercised an large stock option package were subject to the AMT. This hurt, in particular, those who accepted the package as part of a retirement or separation deal. The income is subject to AMT - and you lose all of those other deductions mentioned above.

To make things worse, if you find yourself subject to the AMT and haven’t made estimated payments throughout the year, you may be subject to an underpayment penalty.

In response, Sen. Charles Grassley (R-Iowa) is proposing legislation that would exempt those subject to the AMT for the first time in 2007 from underpayment penalties. And Congress is otherwise considering raising the exemption for AMT for 2007 (um, guys, it’s July…). Band-aids, all.

Here’s a thought: why not just fix the darn thing once and for all?

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