In the great words of my high school cross country coach, "I'm so mad I could fry eggs on my head!!!" Why such "negative karmic energy" on a sunny Monday? The Alternative Minimum Tax, one of the most egregious problems with the US Tax Code.Interestingly, a look on Investopedia, normally one of my preferred finance sites, only tells you that AMT is a "tax calculation that adds certain tax preference items back into adjusted gross income... designed to prevent taxpayers from escaping their fair share of tax liability by using certain tax breaks." Hmm, that's pretty benign for a tax that was enacted in 1970 that has NEVER been indexed for inflation nor tax cuts!!! Live in San Francisco, Los Angeles, New York or any other ridiculously expensive city? Doesn't matter. We all know $75,000 is San Francisco is much different than $75,000 in Topeka, but the lawmakers just can find the time between MLB steroid investigations, holding babies, and flying around in their not-so-carbon-neutral jets (emulating Al Gore) encouraging everyone to vote for "change" (them).
I digress. The AMT is a separate tax code that was created to prevent tax payers from escaping their "fair share" (note: I get really prickly anytime the words "government" and "fair" are in the same sentence) by disallowing the majority of deductions. It is, quite literally, an alternative set of rules for the minimum amount you'll be paying the federal government. When it was enacted some forty years ago, it affected 19,000 people. Now millions are paying it. If you normally owe $47,000 and your AMT calculates to $57,000, you'll pay the $47,000 plus the additional $10,000.
The rates vary between 26-28% as opposed to the regular 10-35%. The main issue is that most deductions are lost under the AMT, including property tax, state and local taxes (enormous in states like CA and NY), unreimbursed business expenses, etc. (You do "get" to keep mortgage interest and charitable deductions, but this doesn't help those of us living in areas where you need $800k for a 1200 square foot flat with no parking.)
Confused yet? Don't feel bad -- I can't help you with the sick feeling, but I can tell you you're not alone: most politicians couldn't explain it to you either (shocker). Another big issue is how complicated it is for you, me, and your accountant. There's no magic number to say, "sorry, you're getting screwed by AMT this year," only "triggers" like having dependents, deductions, etc. With $75,000 income, you begin to be a prime target. And if you're married making $100,000 together (really not that hard to do, especially in bigger cities), you're definitely getting screwed. Since I'm tying the knot in May, I'll be paying even more AMT -- funny, I didn't put that on my registry?!!
If you'd like to read more, here's an informative article... I just threw up in my mouth so I need to stop soon.
On a brighter note, here are some things you can do to better your situation:
1. Contribute the max $15,500 ($20,000 if you're over 50) to your 401k as it minimizes your taxable income.
2. Be sure to write off any charitable donations. Tell your accountant to give you an estimate of your AMT and perhaps choose to donate more to avoid being hit.
3. Consider buying property versus renting. While this isn't for everyone, it does help.
4. Ask you boss for a huge raise! If you make over $500,000 single or married, you're no longer subject to AMT.
5. If you're the political type, consider writing your Congressmen and Senators and encouraging them to reform AMT or better yet, ditch it all together and get on the Steve Forbes flat tax wagon. (I'm in SF and I'm pretty sure Nancy Pelosi, Barbara Boxer and Diane Feintstein -- my three least favorite women, have blocked my mail. Another shocker: given their situations/ incomes, none of these b*tches pay the AMT.)
