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Tax Reform 2017 – The AMT

If you haven’t noticed, one thing that has reared its head again is tax reform. The ‘plan’ hasn’t been made public yet, only a one pager, a summary of the goals. The lack of details hasn’t kept our government from starting the marketing ball rolling on this one. Marketing is the word I’m using here, and I’ve chosen this word carefully. Products can be sold 2 ways. The ‘just the facts’ approach is one. It’s a bit boring, I’ll admit, but it’s how I prefer to discuss most financial topics.

The other way is the ‘marketing’ way, giving bits and pieces of information that appeal more to one’s emotions than to their logic. The slide I show here? It’s what the House Ways and Means Committee published last week. It’s not just marketing, it’s a lie. And it’s not a reason to repeal AMT.

First, let’s take a step back. What is the AMT? Do you know? Do you care? 37% of people thought AMT meant a cash machine, confusing this with the acronym ATM. (I made that last line up. But now that I read it twice, I believe it) AMT is the alternative minimum tax. Some time ago, congress realized that there were people who managed to come up with so many deductions that they paid little, and in some cases, no tax at all. The AMT forces tax payers, in effect, to phase out their deductions when at a certain level compared to their income. I’ll offer one example. A couple with $212K gross income. With itemized deductions of $57K, and their 4 exemptions, they have a taxable $139K, and a tax bill of $26K. Keep in mind, they are in the 25% bracket. This means if I go back to the tax return (I’m using 2016 tax software to run these numbers) and drop the income $1000, the tax bill drops $250. But, even though there’s still room in the 25% bracket, the next $1000 of income will show a rise of $325. $75 of which is due to the AMT effect. The taxpayer sees a phantom 32.5% tax rate even though they are the 25% bracket. 

Let’s talk for a moment about the lies. I have never done my taxes by hand. I could, I suppose, but I’ve always bought tax software. In fact, I just threw out my copy of the MacInTax (later taken over by TurboTax) from 1985. It was on a floppy disc, and my wife said it was strange to keep it. My mementos should be about people not 32 year old tax software. But I digress. I’d also guess that few people are doing it by hand. The DIY means using one of the tax softwares each year. There is no ‘double time,’ the software just does it. Those who go to a storefront or individual preparer are also shielded from the efforts, I assure you, they are using software as well. As far as “double tax” is concerned, the incremental tax looks like a higher marginal rate, nothing is doubled. and the overall tax has the smallest of impacts. Except, of course, for even higher level earners who had far more in the way of deductions.

I’ll admit, the AMT calculation is a bit convoluted regarding how different deductions are eliminated as income rises. In general, it will take over $100K in gross income, and a lot of itemized deductions to put you into AMT land. The exemption amount is $84K for a married couple. Whether that number is fair is up for debate. When our politicians want to make some change to the tax code, they should just be honest, they object to the tax and its impact on their constituents, for whatever reason. The way they are marketing their cause is just a smokescreen.

 

  • Nathan September 5, 2017, 10:50 am

    The only legitimate complaint I’ve heard about the AMT is that it isn’t properly indexed, so it hits lower income levels year after year. If it was intended to be a tax on the 1%, then the exemption should be much higher than $84K for a married couple. That’s an easy tweak that doesn’t require an outright repeal.

  • Nathan September 5, 2017, 10:53 am

    If there are other reforms that will trade common deductions for lower rates (this seems to be the perennial republican promise) the AMT discussion might be less interesting over-all anyway.

  • Joe September 6, 2017, 5:32 am

    Agreed, 100%. Keep in mind, it was the AMT that got Trump, on the only tax return that we’ve seen. Just as I’ll concede that the estate tax can continue on its indexed path, the AMT needs a one time bump, and then indexed.

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