This year AMT exemption will decrease from $62,550 to $45,000. What can we do to stop the back-peddling?

Question

Warning: This year, more middle income families will be unexpectedly subjected to Alternative Minimum Tax just for regular tax preferred items, such as State Tax, Property Tax and personal exemption ($3,400 per person). This will cause tax on top of tax, and seriously jeopardize the middle income families' financial well-being. Are you subjected to it? Check out earlier and do not get caught in surprise next April. Talk to your congressmen and senators to get their support in extending the $62,550 exemption. Do not wait till it is too late!

Thank you for the reply!

But if you go to the IRS website, one the changes for '07 is the reduction in exemption. How can that be explained?

Answer 1

The reduction on the IRS website is easily explained by the fact that Congress has yet to act. The whole thing is smoke and mirrors blended with politics. The problem is that if it stays at 45,000 (the permanent level it's been at for a long time, by the way) the number of taxpayers hit by the AMT will more than triple to over 21 million. There would probably be riots in the streets -- and mostly law-abiding middle class folks at that!

To keep all of those suburbanite rioters safely in their beds, Congress has been "temporarily" raising the exemption annually as part of "must pass" budgetary legislation that is exempt from filibuster rules. Why don't they just fix it permanently? Read on!

Congress wants to raise it and permanently index it to inflation but here's where the smoke and mirrors come into play. At $45,000, there's a future budgetary stream of about $1 trillion buried in the AMT. By keeping the "permanent" rate at $45,000, Congress can keep that $1 trillion projection alive even though not a dime of it will ever be realized. If they permanently change it to $65,550 and then index it to inflation, that $1 trillion future budgetary projection dries up permanently. If that happens, Congress will have to do one of two things -- may be a mixture of them actually. They'll either have to raise taxes someplace else by $1 trillion OR cut $1 trillion from future budgets. The political implications of that should be fairly obvious!

A solution may be on the horizon though. The Democrats are now in control of Congress and most political junkies expect them to take back the White House in '08, unless something REALLY shocking happens before then. Everyone expects that Democrats will raise taxes -- which they probably will do, but mostly on the wealthiest Americans, IMHO. That will be the perfect time to do two things that will solve the issue: Boost the exemption amount permanently and index it to get it off the backs of the middle class, but offset the projected loss by raising the maximum AMT tax rate or maybe create a new top-tier rate that will only affect the wealthiest Americans.

A Democrat who raises taxes doesn't commit political suicide in the way that a Republican does. Look at Bush Sr and Bill Clinton. Bush Sr swore "No new taxes" and then had to raise them, and we all know what that got him! Clinton raised them again AND got reelected despite alleged scandal after scandal. Clinton was right about one more thing: It really WAS all about the economy. Even though he did raise taxes, REAL income after taxes rose for most Americans during his term in office. Bush Jr cut taxes and real income has been dropping ever since, for all but the wealthiest Americans. Hmmm...

Answer 2

They are not planning on reducing the AMT amount to 45,000, Congress is actually looking to increase the amount to index for inflation, so that fewer taxpayers are subject to the AMT