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The Alternative Minimum Tax: Impending Tax Shock To Hit 19 Million Payers
by Mark Skousen, Chairman, Investment U
Friday, November 3, 2006: Issue #602
I always postpone the unpleasant filing of my federal and state income tax returns for as long as possible. For most Americans, the dreaded date is April 15, but for me, it’s October 15, after I instruct my accountant to file the standard extension.
This year, my accountant had some nasty news for me. I was hit hard by the dreaded “Alternative Minimum Tax,” so much so that I was faced with having to pay additional taxes, interest and penalties on both my federal and state returns. It was not a pleasant event for my pocketbook.
At the same time, my publisher asked me to attend a fundraising event where Vice President Dick Cheney and Senator George Allen of Virginia were appearing. I declined the invitation, telling my publisher, “Sorry, but they already have all my money via the IRS.”
Frankly, I’m mad as hell about the sneaky ways this spendthrift Congress raises my taxes (with the exception of incumbent Ron Paul, who is opposed to the Alternative Minimum Tax (AMT) and other unfair taxes).
And now I come to find out that this obscure federal AMT is about to mushroom. According to the Tax Policy Center, next year almost 19 million taxpayers will be subject to the Alternative Minimum Tax, or AMT, up from roughly 3.4 million this year and 1.3 million in 2000.
Take a look in the following chart
So much for the Bush “tax cuts”!
Basically, if you earn more than $75,000 a year (sometimes even less), you could be subject to the Alternative Minimum Tax. The AMT effectively sets up a parallel tax system for all households, in which few deductions are allowed. Taxpayers whose alternative tax is higher than their regular federal income tax must pay the alternative one.
Property taxes, state and local income taxes, and the standard deduction and personal exemptions for children and dependents are normally deductible, but not in the alternative one. The higher those deductions, the more likely a household is to fall into the Alternative Minimum Tax.
What’s the Tax Situation If You Live in These Four States?
- California
- Massachusetts
- New Jersey
- New York?
Half the taxpayers in these states, representing a quarter of the nation’s population, are paying the Alternative Minimum Tax.
Bush’s latest budget makes no provision for repealing or reducing the AMT. All he did was create a commission to study the matter.
Fortunately, there are some loopholes to the nasty Alternative Minimum Tax
3 Ways to Avoid the Dreaded Alternative Minimum Tax
- First, mortgage interest is exempt. In general, real estate investors can avoid the Alternative Minimum Tax as long as they don’t do accelerated depreciation on their rental properties.
- Secondly, long-term capital gains on stocks, bonds and real estate are taxed at the same rate (15%). The maximum rate is 15% no matter how much gain you make on stocks, bonds and real estate, assuming you held the asset for one year or more.But if your real estate consists of your home and a vacation condo, watch out. You may find yourself being hit with the onerous AMT and losing your valuable property tax deductions. It might be better to rent and focus on earning long-term capital gains on your stocks, or rental properties.
- Finally, contributions to charities, churches, foundations and free-market think tanks like the Cato Institute are not subject to the Alternative Minimum Tax. Instead of wasting money on reelecting tax-hungry politicians, I suggest you make generous donations to your favorite charity, church, or anti-tax think tank.
Good investing,
Mark
Today’s Investment U Crib Sheet
Congress may be ignoring the fact that the Alternative Minimum Tax is hitting more and more tax payers, but the IRS is getting the word out, as it tries to reduce the number of incorrect filings:
“Before mailing your federal income tax return, check to make sure you aren’t subject to the Alternative Minimum Tax. In recent years, more and more people have found themselves subject to the AMT.” Conclusion: Find out if the AMT will affect you.
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