by Nancy Osborne, COO of ERATE
The AMT is currently thought to be the biggest problem with the
U.S. tax code. Today it impacts an estimated 11% of all taxpayers.
However its reach is growing each year and by the year 2010 it is estimated to
impact up to 34% of all taxpayers if it remains unchanged.
What is it?
It is a parallel or dual tax system that forces certain
taxpayers to pay their “fair share” of taxes. The AMT is
essentially a flat tax that is assessed at a rate of 26% to 28% depending upon
ones income. It looks at a taxpayer’s adjusted gross income (AGI)
and subtracts their itemized deductions. The AMT restricts certain
taxpayers from claiming some deductions, exemptions and exclusions and requires
these taxpayers to add back into their return some income that is normally
considered tax free. The standard deduction does not exist within the AMT
and neither do the exemptions that can shave off a significant amount per
dependent from ones taxable income.
Why Does It Exist?
It was created as a result of the Tax Reform Act of 1969.
It was intended to target the approximately 155 high income households that
took so many deductions under the system at that time that they paid little to
nothing in taxes. Today the AMT insures that taxpayers with high
deductions, exemptions or exclusions pay a guaranteed percentage of their
income in taxes.
Who Does It Affect?
Unfortunately the definition of “high income” in
1969 hardly applies today. Because the AMT was not indexed to inflation
or by geographic region an increasing number of middle-income taxpayers are
being subjected to this tax, it is not a tax only for the wealthy any more as
many taxpayers with incomes as low as $42,500 are being victimized by the AMT
today. If you are a taxpayer with a lot of deductions, exclusions or
exemptions from state income taxes,
real estate taxes,
interest and passive investments, you may be subject to the AMT. It
has also been noted to significantly impact taxpayers who have exercised
certain types of stock options.
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Why is it a Problem?
In 2005, the median household income in the entire U.S. was
$44,400 and the AMT is thought to impact only those households earning over
$75,000. Thus the argument is that the AMT only affects the wealthy and
the upper middle class. Unfortunately in many areas of the country, most
notably metropolitan areas of the east and west coast, the median income is
close to or exceeds $75,000. In these areas the cost of living is much
higher and those earning incomes within this AMT targeted range are not upper
middle class but are solidly middle class according to the standard of living
within their area. The problem results because the AMT is not indexed to
either inflation or to the median income of various geographic regions.
Why Doesn’t Congress Fix It?
The loss of revenue to the government would amount to somewhere
between $800 billion to an estimated $1.5 trillion over a 10 year period.
The AMT translates into a flat tax on adjusted gross incomes over $175,000 at a
rate of 27%. Because government statistics show that households earning
in excess of $200,000 contribute more than half the AMT revenue, changing the
current system would, in their view, disproportionately benefit high income
taxpayers. Currently households with incomes below $75,000 are very
rarely subject to the AMT but this could change in the coming years if the
system is left unchecked.
How Can I Avoid the AMT?
The best way to minimize the impact of the AMT is to claim fewer
tax preference items (this includes exemptions, exclusions and deductions) on
schedule A of your federal return. The most significant tax preferences
on schedule A relate to state income and real estate taxes. If within a
given tax year, your AMT income is greater than your standard taxable income,
you may want to push your last real estate tax payment and state estimated
taxes into the subsequent tax year.
Nancy Osborne has had experience in the mortgage business for over 20 years and is a founder of both ERATE, where she is currently the COO and Progressive Capital Funding, where she served as President. She has held real estate licenses in several states and has received both the national Certified Mortgage Consultant and Certified Residential Mortgage Specialist designations. Ms. Osborne is also a primary contributing writer and content developer for ERATE.
"I am addicted to Bloomberg TV" says Nancy.