If you go back as far as this writer, you may recall the famous line by Steve Martin on a late 1970’s vintage episode of Saturday Night Live, “You too can be a millionaire and pay no taxes.” It was true then and it’s probably still true today, with the caveat that all those millionaires having paid no taxes are now billionaires. Because some of America’s richest people were indeed paying zero taxes, in 1969 congress implemented an add on tax amounting to 10% of tax preferences in excess of $30,000. This was the first version of what is today referred to as Alternative Minimum Tax(AMT).
In 1982, the Regan administration gave people making over $200,000 a 43% reduction in their tax rate, from 70% down to 50%, while the lower income taxpayers received a 14% role back in their tax rate, from 14% to 12%. To get the democratic congress to go along with the cuts, Reagan significantly increased the ATM tax rate and other provisions associated with AMT.
The way million and billionaires pay no taxes is by taking advantage of what the IRS calls tax preference treatment, in simple terms tax write offs, tax shelters, accelerated depreciation and tax credits; as most people refer to them, tax loopholes written into the tax code for people who can afford to pay an accountant to find them. But, if a taxpayer can and does take advantage of such loopholes the ATM tax kicks in to prevent them from having a zero tax liability.
A certain portion of taxable income is exempt from AMT. In 2010, tax payers filing jointly and qualifying widowers are allowed $72,450 of taxable income before AMT kicks in. Keep in mind this is “taxable income and not gross or adjusted Gross income (AGI). For married couples filing separate returns the exemption is $36,225 and for single individuals $40,450. The base AMT tax rate is 26%, but there is a higher 28% rate that kicks in for taxable incomes above $175,000 for single and married filing joint return filers and $87,500 for married individuals who file separate returns. In addition, there is a special AMT capital gains rate of 25%.
AMT is calculated on as special IRS schedule, form 6251, but calculating AMT also takes into account some other forms. For instance, when depreciable assets are involved, the Depreciation & Amortization Schedule form 4562 must be recalculated using AMT depreciation rates. For less sophisticated returns, Schedule D, Capital Gains must be recomputed using the 25% AMT capital gains rate.
If, in terms of tax return preparation, there is an area of taxation representing the greatest challenge to tax prepares, AMT would be a prime candidate for the honor. Many tax prepares rely on tax software to handle it for them and this can end up costing tax payers big money or even a trip to the IRS office to have their tax return examined (audited) in detail. The prudent tax payer will have their professional preparer give them a line by line explanation of form 6251 entries and calculations. Even if the taxpayer doesn’t understand it, it forces the preparer to understand what their computer and software has elected on behalf of their client.
Finally, if a tax payer is nailed for AMT tax one year, they may be able to get a credit towards their tax liability the following year. The taxpayer should make note of this and ask their preparer the following year about it. This is particularly important when a change in tax preparers takes place from one year to the next.
Well, AMT is probably a tax the vast majority of Americans wish they made enough money to have to pay. But for those who do have to pay it, it may seem like a case of adding insult to injury, but they can afford it.