The Alternative Minimum Tax (AMT) has never been easy to understand. It is therefore ironic that the White House and US Treasury created the AMT in the 1960s as a simple political strategy to tax the rich who paid no tax. Indeed, 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 2014, your tax attorney may be soon be informing you that you have been snared by the AMT tax. When you ask her how that is possible, she sadly goes on to tell you that the AMT has morphed into a monster that is taxing millions of middle class American families like you. But it's not too late to still proactively tax plan to protect yourselves from the claws of the AMT. So stay with us here on TaxView with Chris Moss CPA to learn what you can do before the AMT gets you.
In order to understand the enemy AMT, you have to understand why Congress has allowed this tax to capture many middle class Americans for so many years. It all started back in 1969 or so when Treasury Joseph Barr announced that 155 of the highest income Americans did not pay any income tax, Wilbur Mills (Fanny Fox) sprung into action as Chairman House Ways and Means Committee. and the Tax Reform Act of 1969 was born under the Nixon administration.
Fast forward to Ronald Reagan and Chairman House Ways Means Committee Dan Rostenkowski who revised the AMT by enacting the Tax Equity and Fiscal Responsibility Act of 1982. (TEFRA). 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. Congressional attempts to sufficiently raise the AMT exemption have simply not keep up with two wage earner middle class American families. Fast forward again, and this is how Max Baucus Chairman Senate Finance Committee saw it in 2007 as he expressed disappointment that the Senate Minority leader quashed an attempt to raise the exemption. While the American Taxpayer Relief Act of 2012 finally indexed the AMT exemption for inflation, there are no "catch ups" for past years prior to 2013 for wage increases for working Americans. So the sad fact is that many Americans are still going to be captured in 2014 by the AMT.
So how could the AMT capture you this year, If you make $100,000 a year working as an engineer for a local contracting company and your spouse makes another $100,000 working for a local college as a college professor you are in AMT range. Add three children, live in a high tax state in a home you own and you get dangerously close to AMT capture.. Add a second beach home and unreimbursed business expense and bingo, you've been captured with over $12,000 in AMT for 2014.
And now for the astonishing news: If you had no kids, paid no state income tax because you relocated to Florida or Texas, rented your home that you do not own, took lavish vacations in hotels rather than vacationing in second homes, and lived off interest and dividends from stocks you inherited without you ever working a day in your life, then Congress in its wisdom of insanity says you are exempt from AMT.
What can you do now? Ask you tax attorney if you can use the now or later tax strategy. If given a choice, pay tax later rather than now. Because you just never know what the future may bring. So think out of the box: pay that state tax perhaps in 2015 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 2015 not 2014, Again, think out of the box: Ask your tax attorney if it better not to take the kids as deductions or claim all those unreimbursed expenses. Finally, let your elected officials know that the enemy AMT is headed your way. In the meantime, keep deferring the dreaded AMT until later years hoping Congress will keep the enemy AMT away from you.. Thank you for joining us on TaxView with Chris Moss CPA.
Chris Moss CPA