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Wednesday, November 14, 2012

IRS to “Back-Value” Heinous AMT to 2012?

 

 The Wall Street Journal reports this morning that Obama is going to ask for $1.6T in new taxes when he speaks on Friday. The only way that this sized tax increase could be accomplished is if the AMT tax is indexed to inflation and hits tens of millions of of additional taxpayers.

 

 

I have warned readers about the possibility that the AMT tax is going to go mainstream in 2013 here and here. Yesterday, the IRS came out with its own warning.

 

 

In 2012, about 4m taxpayers will get stuck paying the AMT tax. As the WSJ headline suggests, that number could go to 33m  in 2013. That’s a massive increase; it will cause all sorts of problems. From the IRS letter to Senator Hatch re the AMT:

 

If there is no AMT patch enacted by the end of the year, the IRS would be forced to operate the 2013 tax filing season based on the expiration of the AMT patch. There would be serious repercussions for taxpayers.

 

 

The changes to the AMT exemption amount and the special tax credit ordering rules could affect more than 60 million taxpayers – nearly half of all individual income tax filers.

 (Note: Even if you do not owe AMT, you have to fill out and file the AMT forms.)

 

About 28 million taxpayers would be faced with a very large, unexpected tax liability for the current tax year (2012).

(Note: The AMT patch actually expired in 2011; a one-year exemption was granted, but the exemption is not effective if not re-patched. This was a legislative “time bomb” that was included in the deal that created the fiscal-cliff (debt ceiling deal).

 

Okay, got that? The AMT is a disaster. It will force 60m people to confront a very complicated new set of tax forms (I know, I have paid AMT for years). It will be retroactive. It will cause 30m people fits when they realize they will have to pay out of pocket or get a much smaller refund for 2012.

 

But, there is another side to the AMT. It does exactly what everyone says is needed.

 

-It raises a ton of revenue; $1Tn over ten-years. (More than the Bush tax on the +250K folks)

 

-It eliminates all deductions for high-income earners. (The mortgage tax deduction is carved out however).

 

-It broadens the base.

 

-Allowing the AMT patch to elapse does not increase tax rates; it establishes a minimum tax rate (currently 28%). This would allow Republicans to claim that they successfully fought off an increase in marginal tax rates. Democrats would be able to say they increased taxes on the rich.

 

 

I think the AMT tax is a conundrum that has to be fixed. It is the most heinous aspect of the fiscal cliff. I say that because it is the only tax related to the fiscal cliff that has negative implications for 2012 (everything else is forward looking). Can Congress fix the problems with AMT? Sure they can. There are dozens of options. But Congress must act to fix the problem, they simply can’t “do nothing” as has been suggest by some Democrats.

 

I was not aware that the AMT had retroactive tax consequences for 2012. That it does, is a game changer. If we go down the road towards no compromise, and AMT becomes a reality for all taxpayers, the consequences of the fiscal cliff will be much larger than has been discussed in the press. Taxpayers would be crushed in 2013 if there is no action. Not only would most workers face much higher taxes for 2013, they would also get hit with much higher tax liabilities when they sit down and calculate what they owe for 2012. This double whack to the incomes of tens of millions of people would cause a recession far more severe than the one that CBO thinks might happen (small drop in GDP in 1st half 2013).

 

As a ten-plus year payer of the AMT, I say to all, the AMT is truly a dreaded tax. If allowed to expand, it will wreck many taxpayers’ plans on how they should live and work:

 

-Childcare costs would no longer be deductible. (Don’t have that child)

 

-Charitable contributions would not be deductible. (Don’t give money to your Church or any other worthwhile charity)

 

-Real estate taxes would no longer be deductible. (Don’t buy a house, it will be much cheaper to rent than buy on an after-tax basis.)

 

-State income taxes paid would no longer be deductible. (Move out of California, New York and Illinois as fast as you can.)

 

 

I’m one of the 4m people who has been stuck with this tax for the past decade. I’m praying for relief. I want the AMT abolished. But, for the life of me, I can’t see how that can happen. If there were a compromise on the fiscal cliff that resulted in the +250K crowd getting their marginal tax rate increased from 35% to 39.5% (the Obama plan) then I would end up paying LESS taxes then if I was subject the current AMT.

(Note: I live in a high income tax state, and pay high property taxes. I would be much better off with those deductions than without, even if the marginal tax rate is increased)

 

So they can’t do that. Guys like me can’t be getting a tax break as a result of the fiscal cliff. That outcome would be a complete joke (I would love it).  This argues in favor of making the AMT permanent (the 2012 look-back could be easily patched).

 

I say again, AMT is a heinous tax, but it looks like it is going to become a reality anyway. The IRS has said that there will be big problems if AMT is allowed to impact large numbers of taxpayers.  But without a minimum tax rate, revenues would fall (me). If AMT is expanded, the 30 odd million that pay the price ,will just hate the outcome. Get ready.

 

Comments

  1. NONE of those things should be deductible, especially not mortgage costs. I’m someone that’s enjoyed all those deductions, btw, they’re just BS though.

    It’s about time taxpayers finally started giving a ####. The few of us who pay have been getting ”crushed” long before this and no not ‘everyone’ agrees revenues need to be raised. I couldn’t disagree more. You don’t give a junky more heroin and expect him to become more responsible and kick the habit.

  2. Unfortunately for you, you will not see AMT abolished, but the Congresscritters will patch AMT as they have the past 10 or so years, so it eventually will not hit 30M more taxpayers. The IRS does not start accepting e-filed returns until 1/22/2013, and if the patch is passed within 8 weeks of this timeline, the IRS is likely to not accept or process any AMT related returns until 8 weeks after passage of the patch so they can program their systems to be updated with current tax laws.

    Regarding Obama’s $1.6T extra revenue over the next decade, Kevin Drum gives a good breakdown on where that money is coming from. It won’t be from extending the reach of AMT, but it will be from a host of other sources (maybe like limiting your Sch A deductions to 28% instead of 35% if that’s your bracket). See the following link:
    http://www.motherjones.com/kevin-drum/2012/11/president-obamas-brand-new-tax-plan-thats-year-old

    The AMT is too good of a current revenue source for Congress to let go, but not patching it would bring out the pitchforks, so they won’t go down that route either.

  3. Hallelujah, I`m a bum!

  4. The Obama regime is just voguing for the morons in the media — claiming a willingness to expand AMT when it has less than zero of gaining support even from congressional democrats. Eliminating state tax deductions will hurt all the democrat leaning strongholds the most …. CA, NY, IL, and all the New England states. Those are the places with the highest state taxes / property taxes.

    Obama no longer needs to worry about what voters think (as if he did before) — but democrats in Congress still do. The democrats will lose control of the senate (and weaken in the house) if they start attacking their own electoral base.

    While statutory tax rates might get jiggled around, the effective tax rate in the US is already pretty high. The government has shown itself unwilling to go after campaign supporting tax cheats like Govt Electric or Berkshire Hathaway (you have to consider all the tax free bailouts Warren takes — from the Salomon Bros free pass to FNMA to Wells Fargo to GEICO to GenRe to the insider trading scandal last year).

    The facts are that the USA cannot afford the level of government that Washington DC wants. I think Obama is a moron, but even if Romney had won the cost of the federal bureaucracy alone has grown beyond Main Street *AND* Wall Street’s ability to pay for it.

    The media gets lots of free meals and free rides on AirForce One and so forth, plus they tend to be rather left leaning profession to start with. They follow Obama around like teen girl groupies following a boy band. it feeds Obama’s ego, but does not change the constraints he has to govern under

    Its easy for media pundits to make stupid populist claims; easy for politicians to make populist promises. Remember Obama 2008 promising us he would pull troops out of Iraq within hours of being sworn in? Remember his promises about universal health CARE, not universal insurance bills? Remember Obama screaming about racist police officers in Boston? Remember Obama

    Like any other world leader — Putin, Merkel, Hu or Hugo Chavez– Obama has to balance his desire to spend with the country’s willingness AND ABILITY to pay. Making promises and proposals is easy. Reality is what matters

    Read my lips, I did not have sex with my intern, WMD slam dunk, hope and change. All bullshit. Obama can’t raise taxes high enough to meet existing spending promises, never mind all the empty rhetoric. He doesn’t have a fillibuster proof majority in the Senate (and Dems from high tax states are vulnerable to tax deduction changes). He doesn’t have a majority in the House. Pelosi cannot openly bribe congress members on national TV and get away with it again — so Obama cannot jam through more tax increases.

    Maine and Vermont (two democrat party leaning states) now both have “independent party” senators — they caucus with the Dems, but those state voters clearly aren’t drinking the Pelosi kool-aid. California is the original left wing state — but (repeat) governor Jerry Brown is still finding that he cannot spend recklessly no matter what the voters or legislature wants.

    John Boenher can “read my lips” too — its not like he speaks for the growing tea party wing of his party, and its not obvious that he can speak even for “mainstream” republicans (if such exists).

    Washington DC can talk about compromise and tax the rich all they want — the wealthiest counties are those surrounding Washington DC itself. Government employee union members enjoy salaries and benefits that vastly exceed the public they were meant to serve.

    “Tax the rich” is a great campaign slogan, but it won’t be very popular inside the DC beltway where the really rich are concentrated.

    • Not fooled in Nevada says:

      Well written — thank you. It stands to reason then that very little will change in short order..Perhaps expedited global events will put the kabosh on any meaningful reforms, whether it be social security, medicare, or even Oshamocare..

  5. Remember Obama promising to keep his heel on the throat of BP? Made for great press.

    Then reality hit Obama square in the face: BP supplies most of the US military’s fuel, not to mention a huge amount of the UK government’s oil royalties.

    Can’t “fight terrorism” / justify a bloated bureaucracy if your military runs out of fuel. Can’t talk about universal health care “working” in England if the British government needs another bailout.

    Obama’s spending plans are just empty rhetoric for TV cameras

  6. Harry Reid announced today that he will not tolerate any changes to Social Security in any fiscal spending compromises. Screw the next generation, they have no money to offer bribes or campaign contributions. Reid will max out our children’s credit cards before they are toilet trained, he doesn’t care

    Just a matter of time before the crooks from bankrupt states (CA, NY, NJ, PA, MA, IL, HA, etc) announce they will not tolerate elimination of state tax deductions. Tax increases that result in government crooks losing their cushy jobs / pensions is not what the political class wants.

    And before anyone asks: no you may not deduct the cost of keeping a mistress on the side. No you may not cheat on your taxes and then blame TurboTax. Those are privileges available only to the politically connected.

  7. Those who follow Darwin will not be surprised when citizens asking for higher taxes and bigger govenment go the way of the dinosaurs, doodo birds and passenger pigeons.

  8. Social Security only works if you have additional government assistance, handouts, relief and subsidies. It keeps you connected to the government teat!

  9. Western Civilization is now self-destructing. Witness the financial insolvency (masked by counterfeiting and b.s.), the many gratuitous wars, the monumental immigration, the on-going destruction of the middle class, the growing illiteracy (partially created by government loans for higher education), the growing power of the Federal Reserve (a banking cartel), and you see some of the sources of the destruction. When the US goes, it will take everyone else with it, because they have accepted our fantasy of a nation of gezillionaires.
    Thus we are following the lead of Ancient Egypt, Rome and countless other empires who considered themselves to be above it all. Want to check on a successful empire which avoided all this? There was only one. Ready? This one’s a shock. An empire which was almost as corrupt as the US. The Byzantines!!!! Check the National Archaeological Museum in Athens. There you will find an excellent chronological exhibit of Byzantine coins. After the fall of Rome, their coinage went from gold to silver to copper to base metals. At this point they must ave realized that they were flushing their society down the toilet (as the US is today), so they went back to gold coinage. As a result they survived the entire Middle Ages (with some help from the French during the Crusades), and were ultimately conquered by the Turks in 1450 just as the Renaissance was beginning. If you’re not up to traveling to Greece at this time, check out The Byzantine Economy (Cambridge Univ. Pr., 2007)

  10. Wait a minute, I make about $40,000 gross a year of which I pay 35% in total taxes (federal,state, city, Fica and social security).leaving me a net income of about $26,000 to live on. I don’t have any deductions other than basic deduction to make. So does this mean that the tax rate for those making way more than me gets evened out since those extra deductions have been eliminated. I hope so because I am tired of paying more taxes than someone who has more earnings than me.

    • You make $40K? You are **RICH**, and you must pay higher taxes,

      The poor public servants only make $105,000 (average Federal government employee), plus health and pension benefits, plus a shorter work day, plus more vacation time.

      Poor Jeffery Immelt (CEO at Govt Electric) only makes $2 million per year, plus benefits and unlimited use of company aircraft. How can you sit there in your warm apartment and not feel for his suffering?

    • You don’t pay more in real terms, which is what matters – DOLLARS. Not even close.

      You probably don’t even pay more in percentages when you count all taxes – fuel, sales, air, hotel, on and on and on.

      WE NEED LESS TAXES. Not more, not for anyone.

  11. FORWARD! 51million Americans voted for FORWARD

  12. “‘Tax the rich’ is a great campaign slogan, but it won’t be very popular inside the DC beltway where the really rich are concentrated.”

    The “rich” will find a way to get around the code. That’s why it is so important to flatten and simplify the tax code: no play to run; no place to hide.

    • Romney’s tax rate was 14.1%? Does that bracket even exist? He obviously knows how to get around AMT.

      • Getting around the AMT? It’s not rocket science, you just have to learn the rules. Surely Romney invests much of his wealth in tax-free investments. And what fool does not take maximum advantage of the income tax rules? It’s how the game is played. Just like the millions of shiftless Americans who play the welfare system for all it is worth. It’s how the game is played, and neither end of the financial spectrum is the least bit interested in changing the rules. So they ride the hard-working middle class over the cliff while blaming the other end for our woes. The rich players have their campaign donation power, the shiftless players have their voting power, and the hard-working middle class have no power.

        May God have mercy on all of us for not stopping this sooner.

  13. If the FAIR TAX were enacted the AMT and ALL federal taxes on income would go away. FAIRTAX.ORG

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