Quote:
Originally posted by dtb
Shit, I hope not. 'Cause I haven't! I hope I don't get a nasty surprise when I plant myself in front of Turbo Tax this weekend...
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But some of use who live in the wrong color states may get a nasty surprise via the AMT. In my burb, where fed subsidy of $15-20k local tax bills was common -- AMT is hiting people hard. But not me since I am a looser (note true losers spell loser looser).
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Personal Business; The A.M.T.: An Uninvited Guest of the Middle Class
By ROBERT D. HERSHEY JR. (NYT) 1371 words
Published: February 29, 2004
WHO, me? Rich?
F. Scott Fitzgerald may have gotten it wrong. In the eyes of the tax collector, at least, the rich are not so different from you and me.
Some 2.6 million taxpayers this filing season will be caught in a tax net that was never intended for them, and many millions more will have to spend time or pay a tax professional to establish, through complex calculations, that they have no extra tax liability.
The cause is the alternative minimum tax, which was inspired by a disclosure to Congress in 1969 that 155 wealthy Americans who earned at least $200,000 in 1966 paid no income tax. That led to the creation of a sort of parallel tax universe, intended to make sure that even the richest Americans with the most sophisticated tax advisers would pay something, no matter how cleverly they arranged their financial affairs.
Now, however, partly because the A.M.T. was not indexed for inflation, the decidedly nonrich are feeling the bite.
''It's getting the upper-middle-income people'' already, said Gary C. Pokrant, a tax principal at the accounting firm of Reznick Fedder & Silverman in Bethesda, Md. ''In coming years, it's going to get closer to the center of the middle class.
''The world ends then,'' Mr. Pokrant predicted. ''People aren't going to tolerate that.''
Taxpayers are supposed to calculate what they owe each way -- under regular rules and the A.M.T. -- and pay whichever amount is higher. The alternative tax will affect roughly twice as many taxpayers this filing season as it did two years ago, and it is negating a significant part of the relief provided by the 2003 tax cuts that have been heralded by the Bush administration.
Despite cuts in regular tax rates in 2001 and 2003, the A.M.T. rates remained unchanged, so the gap between the regular rates and the alternative minimum rates has narrowed. The difference between the current top rate, 35 percent, and the top A.M.T. rate, 28 percent, is only seven percentage points, compared with a difference of 11.6 points before the 2001 law.
''What I think is asininely stupid is that you have a system that gives with one hand and takes back with the other,'' said W. Val Oveson, who was the national taxpayer advocate at the Internal Revenue Service from 1998 to 2000.
Daniel N. Shaviro, a tax law professor at New York University, said the administration had engaged in ''gamesmanship'' in relying on the alternative minimum tax to minimize revenue loss from its tax cuts.
While devilishly complex to calculate, the tax is fairly straightforward in principle. Above certain income levels -- $58,000 for a joint return, $40,250 for singles -- taxpayers are denied the benefits of personal exemptions for dependents and of various regular deductions. These include major items like state and local income and property taxes, interest expenses on home equity loans (unless used for improvements) and some medical expenses.
Tax preparers hear howls of protest when they tell clients they owe the tax. ''They just don't understand why, after paying real estate taxes and state and local income taxes, they have to add it back in to pay the alternative minimum tax,'' said Jim Solano, an accountant and sports agent in Villanova, Pa.
In addition, some money that is not counted as income for regular taxes must be included when calculating the alternative tax. Notably, the difference, or spread, between the exercise price and the market price for incentive options is taxable income under the A.M.T.
Say an executive exercised an incentive option to buy 1,000 shares for $5 a share, but the stock is trading at $25 a share when she exercises the option. Under the alternative tax rules, she has $20,000 of income, known as the bargain element, even if the stock price subsequently tumbles.
Some taxpayers first hear of the A.M.T. when they receive a notice from the I.R.S. that they owe it -- instead of the regular taxes reported on their returns.
''The high-tax states, like New York and California, are going to get hit the most,'' Mr. Shaviro said.
Still, taxpayers who do not itemize deductions generally will not owe any A.M.T., and itemizers who expect to be subject to the A.M.T. this year can take steps -- apart from a decision not to have any more children -- to minimize the bite.
Some time-honored devices, like deferring income to a future year and accelerating deductible expenses to reduce regular taxes, will need to be reversed if you expect to be subject to the A.M.T.
To minimize the possible damage, you may benefit from exercising incentive stock options early in the year, so you have more time in the same year to sell the stock if the price drops. That way, you can report a short-term capital loss to partly offset the bargain element realized in exercising the option.
You may also want to avoid a special type of municipal bond that finances so-called private activities like sports stadiums because the alternative tax considers income from such bonds as taxable. Some mutual fund sponsors, notably Fidelity Investments, now promote A.M.T.-free bond funds.
Investors who pay their brokers wrap fees -- flat annual fees for a virtually unlimited number of trades -- may want to consider switching to commissions on individual transactions, Mr. Pokrant said. ''Wrap fees are a terrible idea from a tax standpoint,'' he said. The alternative tax does not allow deductions for investment expenses, but commissions are added to costs or subtracted from proceeds, thereby becoming part of a capital gain or loss.
An A.M.T. liability may prompt eligible taxpayers to withdraw money from retirement accounts sooner than they would otherwise, because distributions are taxable as ordinary income, even if some of the account's growth is attributable to capital gains. So a taxpayer in the regular, 35 percent bracket may choose to take a retirement distribution when he is liable for the 28 percent alternative tax rate.
And if you have paid the alternative tax in preceding years but now owe regular taxes, you may be able to claim an A.M.T. credit under a sort of averaging provision. If you were previously liable for the alternative tax because you exercised incentive stock options, you may be able to claim the credit. But a lost deduction for state and local taxes is gone forever.
SOME people may overlook this credit, particularly if they change accountants. Look for the cause and amount of the liability on a work sheet for previous returns, not on the returns themselves.
Despite complaints from taxpayers and tax professionals that the A.M.T. is hitting a vast number of people for whom it was never intended, there seems little immediate prospect of repeal. Without receipts from the alternative tax, the government would face a huge loss of revenue. The Treasury Department projects that those receipts will total $17.9 billion this year. And unless tax law is changed again, some $106 billion is projected to be wrung from 31.6 million taxpayers, or 29.6 percent of the total, in 2010, the last year that the current laws are effective.
Much more likely, specialists said, are temporary palliatives, like the 2001 measure that raised the amount of income not subject to the A.M.T. through 2004. The administration's budget this month proposed an extension through the 2005 tax year that could cut the number of projected payers to 3.8 million from 12.3 million.
''This is serious stuff,'' Mr. Pokrant said. ''They've got to do something.''
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