Bloomberg has a story today that has special meaning for me (Link):
– The USA has a tax that very few pay. It is called the AMT (Alternative Minimum Tax).
– AMT became law in 1969 when it was (shockingly) revealed that (get this):
155 people earned more than $200,000 and legally didn’t pay any taxes.
What is it today? 15Mn?
– AMT (functionally) eliminates most tax deductions (the mortgage deduction is excluded).
– AMT is not linked to inflation. As a result, the threshold for being subject to this tax has fallen every year.
– If applied to all taxpayer today, the AMT would clobber the middle class. It would change the way charities and churches are funded. It would discourage people from having children. It would discourage home ownership. It would crush people who live in states where there is an income tax.
-Congress is well aware of the problems with AMT. Every year for the last ten they have rolled over a "patch". The yearly exemption reads (sort of):
If you didn’t pay AMT last year, you don’t have to pay this year either! Vote for us early and often!
The language from Congress could also be read:
If you were unlucky enough to have been socked with AMT last year, we’re going to stick it to you again. Sucker!
Note: I’m one of the suckers. I’ve been paying this for the last 15 years. It has added up to big bucks.
Consider the Fiscal Cliff as a Wordle:
AMT sticks out. It is the basis upon which some compromise could be reached to avoid the most significant consequences of falling off of that cliff. A few examples of why AMT could become negotiating bait.
-If applied as the law is now written, AMT would raise a ton of revenue ($1Trillion++ over ten years). But politicians could say that “they” did not “raise” taxes, or create “new” taxes.
-The cost of AMT rises with income. It is a “progressive” tax. Democrats like that.
-Republicans want to broaden the base. AMT accomplishes that as well.
-Everyone wants to eliminate deductions (a stealth tax increase). AMT most certainly accomplishes that.
-AMT minimizes petty fraud of the IRS.
Note: How many people create an extra thousand or two of deductions out of thin air every year? Answer: Many. The IRS has no resources to find out. But with AMT, there are no deductions at all. Problem solved.
So who is going to get hit with AMT? A lot of folks is the answer. In 2010 only 4.4 Mn souls got hit with AMT. If Congress does not vote on another patch, that number will jump to 33Mn in 2013 (750% increase!).
Bye bye child deduction. You can’t deduct those charitable contribution you make. But by far the worst hit comes from the loss of deductions for local property taxes and income taxes paid to the state. The question of who will get hit the worst narrows down to the states that have high income taxes and also ridiculously high property taxes. Numbers 1, 2 and 3 on D.C.'s target list:
The Big Apple is in the middle, and will suffer the most. Not only do NYers pay their state 8%, but they have to kick in another 2% for the privilege of living in town. Very big money is involved. All of these deductions could be lost on New Year’s Eve. Ten million people in Metro NY could get hit. It would be like Congress dropping stink bombs on Times Square.
Note. I absolutely promise that you come to hate the AMT. It will cost you, but worse, it will influence your decisions as to where you live, how much you give, how you invest, whether you should have a child and a whole bunch of other things. Oh, and you can forget about inventing those charitable expenses every year (and sweating an audit).