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Wednesday, November 30, 2005

 

Alternative minimum tax a new tax all together.

While playing around on the internet I decided to do a search on taxes. I did this and came across the Alternative minimum tax or AMT. I never knew an AMT existed, probably because I don’t make very much money as it is. So for those of you like me I feel the need to explain what it is before going into a discussion.
The AMT is a tax that is paid if the AMT tax amount exceeds the amount you would normally pay for the regular taxes. There is one deduction that can be taken. While, you can't deduct state, local and foreign taxes under AMT rules, you can deduct the refunds, which would be considered income under the regular tax rules. You’re also taxed on the spread on your incentive stock options; because of this your tax basis for the shares you bought is higher under the AMT, meaning your tax bill will be lower when you sell the shares. The more exemptions you have the more likely it is that you will have to pay the AMT. You really only have to find out which tax you have to pay if your gross income is $75,000 or more. The AMT makes you pay 26% on the first $175,000 and 28% on the excess. An example of having to pay the tax is as follows: Your regular income tax is $47,000. When you calculate your tax using the AMT rules, you come up with $58,000. You have to pay $11,000 of AMT on top of the $47,000 of regular income tax. The last thing you need to know about the AMT is that is does not recognize inflation.
First I want to say that the AMT is a flat tax rate. This is because everyone who has to pay the AMT pays 26% of there income no matter what, and if they exceed $175,000 then they pay 28% on the extra money no matter what.
Because the AMT does not recognize inflation this means every year more and more people will be paying the AMT. In my research I have found in several places that in the year 2010 the AMT will affect 33 million taxpayers. This is a great thing for people who like me like and support flat taxes. The only problem is that when state taxes and social security is added you’re paying out about 33% or a third of your income. I would love to make $175,000 a year but I am not too happy to hear that I would lose $58,333 resulting in $116,667 for the cost of living. I feel that 33% is way too much for anyone to have to pay to the government.
As for the deduction, they are very rare. If you aren’t going to get a refund from the federal government because you make too much money, do you really think your going to get a refund back from the state. Secondly, being taxed on the spread on your incentive stock options is a catch 22. If you buy 10 shares of a stock at $100 then under the AMT rules you have to pay taxes on the $1000. In a best case scenario say the stock value goes up from the $1000 to $2000. The AMT forces you to pay additional taxes on the $1000 you made. Now instead of the stock going up, say the stock goes down and that $1000 becomes $100 and you sell it. You would have to pay taxes like you still had the $1000 instead of paying taxes on the $100.
The last major thing that I think is wrong with the AMT is that it hurts the middle class more so then the upper and lower class. The lower class doesn’t have to pay the AMT ; in fact most end up getting refunds. This tax was originally designed for the upper class, so that they wouldn’t be able to have all these deductions, such as huge business expenses, and get out of paying a “fair share” of taxes. Now the middle class is getting hit with the AMT and all the deductions are going away. In fact the AMT seems to discourage marriage and having children. This is because people who have to pay the AMT loose the deductions others get for marriage and having children. You can’t throw your child to the wolves just because you don’t want another exemption, which can make it so that you have to pay the AMT. So now that the cost of living has gone up and your middle class with a spouse and two kids and you have to pay the AMT you may have some trouble saving money for the children’s college or for your retirement. (Since we know that we are never going to see our social security money.)
In conclusion, as much as I dislike the progressive tax, it works and it seems to be a lot better then the AMT. Unfortunately, I know that I will probably have to pay the AMT. The only solution is to get rid of the tax system as we know it and install a flat rate tax that recognizes inflation, and takes at most 20% of income. The flat tax should also start at a certain income level say $30,000. In this way, there will be no deductions and the people who are under the taxable income won’t get any refunds. But I don’t think I’ll get my hopes up, it will probably never happen.

some webcites to learn more :
http://www.fool.com/taxes/2003/taxes030926.htm, http://www.smartmoney.com/tax/filing/index.cfm?story=amt, http://money.cnn.com/2005/11/09/pf/taxes/amt_101/?cnn=yes

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