profitable

Possibly by the time you are reading this article, the AMT system, the Alternative Minimum Tax system may be fixed for the so-called middle class.   Personally I think if there is a middle class it has, as a friend of mine has said from her sociology class, been shrunk to the size of a bottleneck between the rich and the poor.  But I digress.

What is the AMT Tax?  It was an attempt at trying to get people who didn’t pay taxes to pay them.

It was enacted as part of the Tax Reform Act of 1969 to target the rich.   Sadly, the Congressional leaders that implemented this forgot to adjust for inflation!  Okay, you ask, but inflation is DOWN now, so how can it affect me?  Well, it really isn’t down.  Without adjustments, each year, the alternative minimum tax affects people who make less and less money.  Once, it was set for people who made “a lot of money”.  Now, it can affect people in some cases from $75,000 and up!

The Alternative Minimum Tax was built as an invisible tax system that runs parallel with the calculated federal income tax and checks it to ensure that that the people in higher tax bracket don’t evade paying any taxes through loopholes.

That means that most tax deductions are disallowed.  I will say it again – that means that most tax deductions are disallowed.  So that means things that you might take for granted on your Schedule A may be limited or disallowed entirely.  In some cases exemptions may be limited.  Some examples that come to mind are:

If you claimed the standard deduction for regular tax purposes, the deduction is disregarded when figuring AMT liability. You also must disregard the personal exemptions claimed for regular tax purposes.

Mortgage interest and property taxes are also capped if not disallowed.

I haven’t even started with Medical deductions.

It is not pretty and for the middle class in some cases, it just isn’t fair nor profitable.

Back in 1969, the minimum tax was a 10 percent flat rate.  AMT has mutated over the years to include corporate AMT, and it has continued to grow.

AMT was originally introduced to help fund the Viet Nam war.  It was implemented because in 1967 there were around 155 people who had incomes over $200,000 who did not pay ANY federal income taxes.   Around twenty of them were considered millionaires.  They basically used every legal loophole they could and the media caught on.  The public went crazy.    It took from the Johnson administration (the closing years) into the Nixon administration to implement AMT.  Over the years it was reformed and reformed again.

For the last few years, Congress has been putting a temporary band-aid by imposing stop measures that froze AMT from hitting more people.  Hopefully they will address it head on by the time you are reading this post. 

Remember that the government makes a lot of money from calculating AMT.  I am not entirely sure how it will be “fixed” and at the same time help keep income coming to keep our government and the infrastructure.  Can an individual still be profitable and pay a reasonable amount of taxes?  I think so but we need to think it through.

UPDATE AS OF OCT 1 2008 1:06 PM PACIFIC TIME from the AP:

The tax plan passed the Senate last week on a 93-2 vote. It included AMT relief, $8 billion in tax relief for those hit by natural disasters in the Midwest, Texas and Louisiana, and some $78 billion in renewable energy incentives and extensions of expiring tax breaks. All told, it would cost about $112 billion over five years. In a compromise worked out with Republicans, the bill does not pay for the AMT and disaster provisions, but does have revenue offsets for part of the energy and extension measures.  

So it sounds like the House of Representatives has to vote on it.

Er, how are we going to cover the shortfall for the AMT and disaster provisions?  Maybe there will be more news later!

Any thoughts or comments, dear readers?

Kim Isaac Greenblatt

Kim Greenblatt, in his blog, profitable, talks more on AMT.