look like more americans are getting stung with this.. (thought this was a tax for the very wealthy only) Can anyone offer any tips on avoiding this tax? i.e. planning ahead?
First is give to qualified investment plans like 401K and IRA. These will reduce your taxable income dollar for dollar.
Another way is to have more deductions and credits. I'm not kidding. Having children helps, and so does owning investment real estate and going to school. My wife and I have a zero tax liability this year, due to all three above.
Having children has no effect on your taxes if you pay AMT. AMT is essentially a tax on Adjusted Gross Income minus mortgage interest and charitable contributions. So pretty much anything which reduces your AGI helps. For most of us, that means that the AMT is very difficult to avoid.
There's already AMT threads in the forum; use the search tool.
I disagree with the advice given so far. IRA's, 401k's, and charitable contributions count for AMT and so are almost irrelvant for purposes of reducing AMT liability. The way to reduce AMT (assuming you're subject to it) is to reduce reliance on deductions/exemptions that don't count for AMT purposes, such as:
- state (income) & local (real estate) taxes - exemptions (children, although you can rarely do anything about this) - standard deduction - home equity loan interest not used to improve your home
DW Joe... correct me if I'm wrong. If you live in a state that has high local real estate taxes you are actually liable to pay even more tax under AMT? (assuming you must pay AMT)Doesn't seem fair
Lot of misunderstanding and misinformation about the AMT being spread here. Despite the populist rabble-rousing, the reality is that AMT doesn't really raise your taxes, it puts a floor on how much you can reduce them using deductions.
So you can avoid the AMT by never reaching that floor, but that's an illogical strategy.
<< Having children helps, and so does owning investment real estate and going to school. My wife and I have a zero tax liability this year, due to all three above. >>
<< First is give to qualified investment plans like 401K and IRA. These will reduce your taxable income dollar for dollar.
Another way is to have more deductions and credits. I'm not kidding. Having children helps, and so does owning investment real estate and going to school. My wife and I have a zero tax liability this year, due to all three above. >>
umm, if you guys made enough, you WILL have a tax liability, that's the point of AMT, alternative MINIMUM tax. you can have all the credits in the world, if you make enough money, then the AMT says buh-bye to the credits and hello to a tax bill. tax credits and deductions actually make you more likely you will be paying AMT. you might want to read up on this.
btw, this system of credits make me sick. i don't blame you for using the system that is there, but the idea of tax credits for kids is rediculous. you had 'em, you pay for 'em. Why should everyone else who doesn't have them? What ever happened to "this is how much you made, so this is how much you owe?" deductions and credits are total BS IMHO.
<< DW Joe... correct me if I'm wrong. If you live in a state that has high local real estate taxes you are actually liable to pay even more tax under AMT? (assuming you must pay AMT)Doesn't seem fair >>
Not exactly. Just that you might not get the full benefit of the tax deduction, because the AMT may claw it back, depending on your situation.
EDIT: The AMT is more likely to affect you if you live in a high tax state/municipality, and you itemize.
<< Lot of misunderstanding and misinformation about the AMT being spread here. Despite the populist rabble-rousing, the reality is that AMT doesn't really raise your taxes, it puts a floor on how much you can reduce them using deductions.
So you can avoid the AMT by never reaching that floor, but that's an illogical strategy. >>
The AMT is a serious issue and will affect a significant percentage of households if and when the temporary $58k AMT exemption amount expires. The Bush tax cut will be clawed back for many households, because the reduced regular rates have now pushed them into AMT territory.
Avoiding the AMT by not reaching the floor makes sense if you can shift the "excess" deductions to a year in which your regular tax exceeds your AMT. See this thread for details.
<< Having children helps, and so does owning investment real estate and going to school. My wife and I have a zero tax liability this year, due to all three above. >>
What tax credits do you get for going to school ? >>
As above, hope and lifetime credits. Plus you can write off loan interest. My wife has a degree in the medical field, in which we piled up a debt almost as large as our first house! So, we pay tons of interest every year on a monstrous 30-year student loan, and therefore we get a nice tax break every year for it.
According to TaxCut, we don't qualify for the AMT. I went through the program twice and double checked all our numbers just to make sure. If I get audited by the IRS, I want to make sure I did my due diligence.
I personally think the AMT is a crock. It's trying to eliminate the deductions/credits that have already been initiated. What's the point of the deductions in the first place? If you don't want them, develop a system whereby there are no special rules. Just make a relatively flat progressive tax with no modifications, and be done with it. IE: first 10K in income is exempt, next 50K income gets a 15% flat rate, next 200K gets an 18% rate, and so on... Seems like that would be much more straightforward in the long run.
<< I personally think the AMT is a crock. It's trying to eliminate the deductions/credits that have already been initiated. What's the point of the deductions in the first place? If you don't want them, develop a system whereby there are no special rules. Just make a relatively flat progressive tax with no modifications, and be done with it. IE: first 10K in income is exempt, next 50K income gets a 15% flat rate, next 200K gets an 18% rate, and so on... Seems like that would be much more straightforward in the long run. >>
The AMT is the flat tax you describe. You get a $58k (joint) exemption, then you are taxed at 26%, then 26%x1.25 (due to phaseout of the exemption), then 28%x1.25, then finally 28% above about $500k. It's roughly a 30% flat tax. (An 18% flat tax would lose impossibly large amounts of revenue.) So you may be one of the few who will be happy if the AMT becomes the primary tax for everyone above $75k, despite, or perhaps because of, the fact that you lose all benefits due to children and state and local tax payments.
But for now, I have three words that describe the AMT: Bait and Switch. You think you're getting a tax cut, but you're not. You think you're paying 15% on dividends and capital gains, but it's 22% plus the full state rate. It's even more deceptive than the phase-outs which began in 1986 and have become numerous since then.
David Cay Johnston complains that the AMT is stacked in favor of those over $500k. This is true but Congress doesn't care: there is very little money there. But it's vital to deceive the upper middle class, where the real money is. Phaseouts and now the AMT accomplish this.
<< But for now, I have three words that describe the AMT: Bait and Switch. You think you're getting a tax cut, but you're not. You think you're paying 15% on dividends and capital gains, but it's 22% plus the full state rate. It's even more deceptive than the phase-outs which began in 1986 and have become numerous since then.
David Cay Johnston complains that the AMT is stacked in favor of those over $500k. This is true but Congress doesn't care: there is very little money there. But it's vital to deceive the upper middle class, where the real money is. Phaseouts and now the AMT accomplish this. >>
This is all true. You benefit from the Bush tax cut features such as regular rate reductions, capital gains rate reductions, larger married standard deduction, etc. only if A) your AMT is still less than your regular tax or B) your regular tax rate is more than your AMT rate. Translation: the lower middle class get a bit of a break, the very wealthy make out like bandits, and the upper middle class takes it in the keyster.
I suspect, however, that rather than have 33%+ of US households pay AMT, Congress is going to address the issue. Too many votes at stake.
I just did a quick look over at my fiances taxes. He is claiming head of household with 2 kids and he made about 46,000 last year. It looks like he will be paying about 900 more in amt taxes. This is after he used 2500 for the tuition and fees deduction. : (
btw.......he spent 8000.00 last year on tuition. Is there ANY way we can get more deduction out of that for next year, this year, last year or anything?
The AMT is the flat tax you describe. You get a $58k (joint) exemption, then you are taxed at 26%, then 26%x1.25 (due to phaseout of the exemption), then 28%x1.25, then finally 28% above about $500k. It's roughly a 30% flat tax. (An 18% flat tax would lose impossibly large amounts of revenue.)
I don't like your example. I would NEVER give a 58k joint exemption, or even a 29k single exemption. Thats basically shifting the burden of taxes to middle and upper class, when the lower class derives more benefit from entitlement programs. Like I said, exempt first 10K and then tax the rest. NO EXEMPTIONS OR CREDITS ALLOWED! Since the tax is progressive, rich people would pay a higher portion of their income in taxes to satisfy the "socialists" out there. You would have plenty of revenue coming in, and the unneccesarily cumbersome tax code would disappear. It doesn't have to be complicated to be effective. But it will never happen, because of the lobby dollars of various interest groups who want their tax breaks. It would also level the playing field for attracting corps because a municipality couldn't award tax breaks, it would be more dependent on the attractiveness of the city and surroundings.
The rest of your post basically agrees with what I said, so no reason to address it here.
<< I just did a quick look over at my fiances taxes. He is claiming head of household with 2 kids and he made about 46,000 last year. It looks like he will be paying about 900 more in amt taxes. This is after he used 2500 for the tuition and fees deduction. : (
btw.......he spent 8000.00 last year on tuition. Is there ANY way we can get more deduction out of that for next year, this year, last year or anything? >>
Education deductions should have only a small effect on AMT, and the education credits appear to be unaffected by AMT. [Aside: You need an advanced degree to understand all the flavors of education deductions and credits.] What's probably hurting here, besides the HH status (which AMT treats as Single) and the 2 kids (which the AMT treats as nonexistent) is the Standard Deduction. Your tax program probably looks only at the fact that standard deduction exceeds your itemized deductions. But for AMT your standard deduction is effectively zero!
Force the tax program to itemize deductions even though they are smaller than the standard deduction. I'll bet you save some money this way.
P.S. I think you already ARE getting full value for the education expenditures. Compute your taxes for 0%, 50%, and 100% of the actual expenditures and you will see.
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