Will the AMT Start To Hit the Middle Class?
The AMT or Alternative Minimum Tax was created in the late 1960s to comabt the super-rich avoiding their responsibilities through massive accounting schemes (shelters, front businesses created for deductions, etc.). However in recent years the AMT has begun to loom over the upper middle class. This issue is just start to become real for middle class Americans as the AMT is just beginning to dig into those Americans with five figure family incomes and is poised to plung more and more middle class Americans into the AMT brackets each additional year.
Although we don't deal with tax policy very often on this site, the AMT poses a special danger to the middle class if it is allowed to continue to apply to more and more Americans. The Danger is twofold.
First is the reduced progressive nature of the tax system as the AMT much flatter rate structure replaces the traditional step tax structure.
Second is the elimination of many good programs that are done through the tax system. Because the AMT allows very few deductions, many of the incentives built into the old tax system that have helped millions of middle class Americans send their kids to college, retrain and acquire new job skills in an evolving economy and help (although only somewhat) to pay off catastrophic medical expenses, would be lost.
Although the AMT was originally a powerful tool against ultra-rich tax cheats, its now represents a looming threat over middle class Americans and some of the values we have come to depend on being expressed and embedded in our tax code.
For more information on recent AMT developments:
http://online.wsj.com/public/article/SB117159389782010715-dyw4yf72cRU_0rsmCSmtwWYQ9_A_20070223.html
My eyes stay dry. I am a bit dubious about the value of "incentives that helped millions of middle class Americans send their kids o college, retrain and acquire new skills" etc.
Frankly, I dislike those programs. You are supposed to have 5 different kinds of savings, or 7, each with a separate set of unknowns. You save for college expenses and your brat qualifies for scholarship --- how can you spend your saving legally? We are suppose to plan three different ways to save for retirement, three ways of funding medical care, two ways to save for college for the kids etc. Can we have time to work, rest, per chance, to dream?
I understand that having mere 150k per year in a very expensive part of the country does not make you a capitalist pig, but nevetheles it makes you well equipped to deal with the challenges of tuition, healthcare, retirement etc. without dubious help of "valuable tax programs". I should add that I fill taxes myself, so quite a few times I was filling out a work-out sheet for a "valuable tax program" to conclude, sorry, no cigar. Plus, we have saved a bundle by NOT HAVING COLLEGE SAVINGS ACCOUNT. (Ivy Leage is rather Communistic: you pay roughly what you can afford, but with various coefficient, while college savings account count in 100% toward your ability to pay, home equite counts a small fraction. And they look at the number of kids you send to college.)
February 16, 2007 10:03 PM | Reply | Permalink
A lot of these things do seem like gimmicks, and the Health Savings Accounts aren't saving anybody money anymore. However, I trust my 401K being around when i need it more than a fiscally challenged Social Security.
February 18, 2007 8:54 AM | Reply | Permalink
Insufficient data here. You need to describe how much extra one pays, at what income levels, representative tax rates, etc.
Merely calling the AMT unfair without data and examples also leaves my eyes dry.
February 19, 2007 8:37 AM | Reply | Permalink
The AMT basically is a stealth step towards a flat tax. It eliminates legal deductions and has fewer income brackets than the main tax code. It's basically a way for the government to increase taxes on people without having a public debate about legislating a tax increase. It was always a bad law, passed out of outrage and then ignored for decades. AMT triggers haven't been adjusted with inflation, which is why it's snaring more and more people. The catch 22 is, the more people it gets, the more the government become reliant on AMT revenue, and the less likely it is that the government will do anything about it.
thosethingswesay.blogspot.com
February 19, 2007 9:49 AM | Reply | Permalink
Let me guess. When George W. touts his supposed balanced budget in a few years' time, he is not merely assuming that his own tax cuts will expire. He is assuming that nothing will be done to fix the ATM, resulting in a massive and burgeoning tax increase on the upper middle class, eventually reaching into the middle middle. (Under some scenarios, I have read, it will sweep up individuals making as little as 60K.)
Don't count me as one of the dry-eyed commenters. House paid for, children grown, I don't itemize much, and don't expect to be among the whacked. But I do end to shed tears for our democracy each time Republican smoke and mirrors get in my eyes.
February 19, 2007 11:09 AM | Reply | Permalink
With income under 100k per year it is not all that easy to enter AMT zone.
If you do, it requires some thinking why. If you are a single person who is not a "qualified widow(er)" and has a lot of kids, and with earning in 70-100 zone, then it is perhaps unfair. It does not sound overly typical, though.
Another possibility is some enormous mortgage interest deduction. It is a bit questionably if interest deduction is a good thing: it increases the home prices, and thus it may be a wash for home buyers. (Loosers: tax-collection, gainers: land owners).
I think that AMT is a sound idea, but one could index the deductions, and that would fix it. If people are entering AMT zone because of increased income, that it is a feature, but if it happens because of inflation, this is a bug. But I would not touch the general schema, though.
February 19, 2007 2:25 PM | Reply | Permalink
How about this? Almost 10 years ago I had a mastectomy for breast cancer. I didn't have good insurance and so I paid alot out of pocket; close to 11% of my income. I do my taxes myself, and I answered the work-sheet for the AMT, but it was so effing obtuse, I honestly did not think I was subject to it. My income was less than $100,000 (much less), but sure enough I got a letter from the IRS, I think it was in September saying that because of my medical deductions I owed an additional $700 for the AMT plus penalties and interest. I called them, incredulous, but the woman I talked to walked me through it, and I did owe it.
Now, Bartman, does that sound unfair to you?
I don't have data, but I can tell you that I never claim medical expenses any more, because I feel so insulted by this tax. I doubt very seriously that Cheney or his Halliburton cronies ever pay it. It is only for people who have legitimate deductions that get snared because we don't have lawyers with the language to get out of it.
Jan Knaus
February 19, 2007 4:24 PM | Reply | Permalink
The philosophical problem with the 'super rich' in a democracy is that they tend to be hoarders of inherited wealth. So yes, you want to make sure they pay their fair share- via the AMT, if necessary. After all, to whom much is given, ya-da, ya-da.
Now, I know a lot of people are out there saying 'boo-hoo, you'll have to pay more on your six-figure salary that places you in the upper 5% of the whole world.' Put like that, nobody has much sympathy for those in the middle and lower upper classes about to get hit by the AMT.
But here's the philosophical difference: the people about to get hit with the higher taxes tend to be those who genuinely earn their money. Think lawyers, doctors, accountants, business people, etc. Yes, it's a lot of money- but they've sacrificed a lot to get where they are. The people we're talking about are basically the epitome of the so-called 'American Dream' that promises if you work hard, you'll succeed. And, despite all the problems with the 'Dream,' it's pretty much the best system the world has developed for a happy, healthy society thus far. Punishing those who through their hard work and yes, a bit of luck, are successful does nothing to help those stuck farther down the ladder. It only hurts hard-working families and provides a disincentive for success.
February 20, 2007 12:22 PM | Reply | Permalink
"Yes, it's a lot of money- but they've sacrificed a lot to get where they are. ... Punishing those who through their hard work..."
Oh dear. 26% income tax with 75k deductible is just a normal, non-punitive tax. And how does it punish people like me, beats me. And how it "hurts hard-working families". (Deductible depends on marital status.)
AMT basically means that you cannot decrease your tax liability by more than 30-40% using deductions.
Except that with top tax rates decreased, it may mean that you cannot decrease your tax liability by more than 20% using deductions, or something like that. Which may be a blessing --- conversely, organizing family life so to maximize the deductions can be a curse. Recap: AMT is not a disinsentive for work or investment, but for devising tax shelters.
February 20, 2007 9:13 PM | Reply | Permalink
How about the deductions for mortgage interest and dependents?
Presumably the overwhelming majority of Americans support tax advantages for home ownership and having children.
March 15, 2007 11:57 AM | Reply | Permalink
I thinked it worked at first, aiding the war effort by making the many rich families who paid no taxes start to pay.
March 15, 2007 11:59 AM | Reply | Permalink
Exactly right.
March 15, 2007 11:59 AM | Reply | Permalink
Having kids and buying a house is far from devising a tax shelter.
March 15, 2007 12:02 PM | Reply | Permalink