AMT- Well Over-Taxed

Yesterday we talked about the tax-free life. Today TaxMama hears from Mary in CT, who feels overtaxed. She says, “Can you explain the AMT. How does one qualify for it? My husband and I have a decent combined income (we work long days and my husband works two jobs) but we also pay a bundle in taxes (federal, state, FICA, property, etc).”

Dear Mary,

What an interesting twist to the question of AMT. Wanting to qualify for it!

Sweetheart, that is the last you want to do.

Originally, when created in 1970, the AMT was a way to ensure that the richest folks in the country didn’t get away without paying any taxes. It took that long for Congress to pass the legislation after it was learned that in 1966, 155 taxpayers with AGI over $200,000 paid no income tax.

Before AMT, when someone earned a lot of money, but they could afford the high-priced attorneys and tax professionals, they would learn how to take high deductions and paper losses.
And you’d always hear about the rich never paying taxes.

So, clearly, the AMT was meant to be the solution.

In 1970, this affected about 200 people. According to the Brookings Institution, by 2010, this will affect 33 million people!http://www.brookings.edu/views/op-ed/gale/20040121amt.htm

The alternative minimum tax is a penalty. It’s not a privilege.

Back then, they were addressing people who earned $200,000 or more – which, at that time, could have bought you half of a city. They were RICH!

Today, however? It affects people with incomes in the $40,000 – $60,000 range.
http://www.irs.gov/pub/irs-pdf/f6251.pdf Which, in a city, barely gives you enough money to cover rent, a car and basic employment taxes – and that’s without buying groceries of cleaning your clothes. Even today, a small percentage of the nation earns over $200,000. They really need to raise the income thresholds – but won’t, since the AMT brings in billions of dollars.

If you want to learn much more about AMT, IRS has a nifty AMT assistant to help you figure out if you’re a victim. http://www.irs.gov/businesses/small/article/0,,id=150703,00.html

Kay Thomas at Fairmark Press has a good explanation of how AMT is computed today.
http://www.fairmark.com/amt/amt101.htm

But if you really want strategy about how to avoid it, well, that’s why the tax pros get paid the big bucks – to develop legal, sensible strategies. The good ones don’t really want to publish their ideas – and they shouldn’t.

And remember, you can find answers to all kinds of other questions about Alternative Minimum Taxes and all kinds of other tax issues, free. Where? Where else? At TaxMama.com

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