Monthly Archive: July 2012

Alternative Minimum Tax Nightmare

The Alternative Minimum Tax is never fun.  It is, therefore, ironic that the AMT was never thought of by Congress as “not fun”. In fact, the AMT was nothing more than a fun tax the rich scheme back in the day; not all the rich mind you, just a few hundred rich folks that legally paid no tax.  It was a feel good kind of tax that most of us would appreciate back in 1969.   But today in 2012,  you are rather shocked; You wonder why Congress would punish wealthy people for tax planning successfully?   Yes indeed, the legislative history shows that AMT was an attempt to neutralize superior tax planning by a very few wealth individuals enabling them to make lots of money and pay no tax.

But that’s not how the Joint Committee on Taxation saw it during a presentation in 2007 to the Senate Finance Committee.  The JCT says the AMT evolved from the Tax Equity and Fiscal Responsibility Act  of 1982.  That is simply not true.  A very basic “minimum tax” was created in the Tax Reform Act of 1969 when Congress discovered a few folks who made over $200,000 a year (a lot of money back then) paid no tax.  That tax was repealed in 1982 and replaced with a new set of rules that somewhat resembles what we have today.  The key point is that in 1982, unlike 1969,  Congress changed the law from a tax on a few hundred to a tax on potentially millions of Americans, many of them not so rich.  And that is not a fun tax at all, that is a tax nightmare.

But in your case you feel you are not even close to being rich?  So what is to worry about?  You are solid middle class.  You make about $100,000 a year working as an engineer for a local contracting company and your wife makes another $100,000 working for a local college as a college professor.  You have 3 kids and a nice house with a second beach home in a high tax state.  You have a lot of expense that you incur for which you are not reimbursed by your boss and have the obligatory 3 cars that incur personal property tax.   And now for the bad news: Unless Congress creates what they call a “patch”, the AMT is going to hit you big time.    In its wisdom of insanity,  Congress says that if you have kids, pay real estate tax on homes, cars and boats, make hard earned wages and incur expense in your job you are not reimbursed for, you have been chosen by your elected officials to get hit with AMT.  On the other hand if you have no kids, pay no state income tax, rent and do not own homes, and make all your money in dividends,  even if  over $20,000,000 (Twenty Million) from investments, then Congress in its wisdom of insanity says you are exempt from AMT.

What can you do now?  Use the Chris Moss now or later philosophy.  If you have a choice, pay tax later rather than now.  Because you just never know what the future may bring.  So make sure you plan to pay that state tax perhaps in 2013 rather than have it withheld from your paycheck now.  Perhaps pay that late fee on your real estate tax so that you pay it late in 2013 not 2012,  Keep deferring the dreaded AMT until later years hoping Congress will create the patch to fix the AMT.  Paying tax later is always better than paying tax now, especially when we know the Alternative Minimum Tax Nightmare is headed our way,