Recently I read a headline that since congress still isn’t sure about what to do with the alternative minimum tax, millions of potentially incorrect tax forms are going to the government printers. Additionally, tax returns will probably be delayed next year since people who use the incorrect forms will have to file an amended return. I haven’t even heard of the alternative minimum tax until I started working in 2005. Apparently a lot of my peers aren’t aware of this tax either. Even if they do know what it is they’re pretty confused about it. I am actually pretty confused by it, too, but I will list a few things I know that annoys me here. I encourage those who are more knowledgeable about this particular tax system to comment.
1. It’s Another Set of Forms to Fill Out – I think this part annoys me the most. Filing taxes is already complicated enough, but it’s doubly as annoying when you have to fill out forms for a second set of tax rules. This second set of rules makes everything more confusing because you have to keep track which set of rules goes with with tax system. What’s more annoying is that I usually can’t determine whether or not I have to pay the AMT until I complete both forms.
2. You Can’t Deduct State and Local Taxes – In the regular tax system the taxes I already paid to California is a deduction and no federal tax is paid on the money, but in the AMT state and local taxes (including local real estate taxes) are disallowed as deductions. This means that you pay taxes on the money you already paid as taxes. That just doesn’t make sense to me. In high tax states like California it could mean paying hundreds to thousands of dollars more on money you didn’t receive in the first place.
3. It Is No Longer a Tax for the Rich — The legend goes that this second system of taxation was invented in 1969 to prevent 155 extremely rich individuals from paying very little or no taxes. Then it was never indexed for inflation so now almost 40 years later we’re still using 1969’s standard of “extremely rich” to determine who should pay this tax. That makes absolutely no sense to me. Also, the standard of “rich” is very different across the United States. Here in the Bay Area, a family of four making $75,000 to $100,000 a year is by no means fabulously rich because our cost of living is extremely high. Adding to our cost of living is our high state taxes that can’t be deducted. Exemptions on children also can’t be deducted so families with more kids would be more likely to thrown into AMT status. It is estimated that 50% of families making $75,000 to $100000 a year will be subject to the AMT, and it is just an additional financial burden on a lot of middle class families.
4. It Nullifies Most, If Not All Tax Cuts in the Original System — Whenever I try to explain this point I have people saying that I am a conspiracy theorist and that the government didn’t intend for the AMT to hit the middle class. But here are the facts, suppose you paid $3000 originally in federal taxes and your AMT calculation comes out to $2999, then you don’t have to pay the AMT because your tax amount in the original system is higher. However, suppose the Bush Tax Cuts cut your taxes in the original system down to $2400, then you scored $600 right? Nope! You still have to pay $2999 because the rules governing the AMT hasn’t changed and now the AMT is the larger amount. In cases like these the AMT pretty much nullifies the tax cut completely. I have known people who started to pay the AMT because the Bush tax cuts made their federal tax lower than the AMT, and basically these middle class families didn’t benefit very much at all from the “tax relief”. I actually think the Bush tax cuts are fiscally possible because of the AMT. As I mentioned in the previous point, the AMT isn’t indexed for inflation, so they know that more and more people will be thrown into AMT status every year, and that means collecting more revenues from this second system as time goes by.
Anyway, I will conclude my rant here. Here’s a funny thought: if the alternative minimum tax never gets indexed for inflation, eventually everyone will qualify, and it will no longer be “alternative” and nobody can say that it’s a tax for the rich because everyone will be paying it. Then the IRS can just print one form again and completely abolish the original tax system!
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4 comments ↓
Yes! I am fully frustrated by the AMT. It bothers me that we could be affected by it this year (it people that make between 75-150k fall in that range). I hope they do something about it soon.
Also, I would love a simple scale to tell me if we qualify. Like, you make over X amount you qualify for AMT, under you don’t. It seems like there are too many variables.
It REALLY bothers me that it’s no longer just a tax on the rich. The govt needs to fix this quick.
Like many other things, nobody had the foresight to account for inflation.
If you think of x% of your income going to the feds, and y% of your income going to the state, you should pay (x+y)%. Not x% + (1-x) * y%.
That being said, politicians like taxing the rich. The rest of the people don’t complain as much and they only lose donations/votes of the rich… a much smaller percentage.
[...] but I don’t like how ridiculously complicated the system is. I have written previously about the AMT and the marriage penalty and I think all these weird exceptions should be ironed out and [...]
[...] have written about the AMT before and pointed out that it is no longer a tax for the rich even though it was designed to be a [...]
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