The lie about the new tax credits: AMT claws them back!

Seems the hybrid car manufacturers successfully lobbied that credit out of AMT, and so did the solar energy manufacturers.

6871,00.html So where were the HVAC, heating and air conditioning manufacturers?

When you look at how Congress manages to very suddenly slip those lobbyists AMT favors, but not the HVAC manufacturers, you begin to wonder who wasn't willing to pony up at the congressional bar?

Again, given that the hybrid car credit and the solar energy credits are both applicable even for AMT, but the other nonbusiness energy credit is not, it doesn't look like an accident.

So let me see if I've got this straight...

Congress exempts from the AMT two tax credits which are more likely to be taken advantage of by wealthier people, since they involve higher expenditures, while not exempting from the AMT tax credits which are more likely to be taken advantage of by less wealthy people.

And the AMT was intended primarily to apply to wealthier people.

And this makes sense how, exactly?

Hmm. I searched Form 6251 and its instructions, and I can't find any reference to how to include the hybrid vehicle or solar energy credits when calculating AMT.

I'm not sure, but I think these may only apply when the credits are taken by a business rather than an individual.

If I'm wrong, somebody please point me at the part of the form / its instructions that I'm missing ;-).

Thanks.

I'm kind of lost by your reasoning. It is the wording in the third paragraph that confuses me as energy efficient improvements don't cause AMT nor do they cause a tax liability. So I will assume, your reference to how this could happen is referring to a tax liability that surprised you given that you thought certain tax credits (both nonrefundable and refundable) would generate a larger tax benefit than your numbers portray.

So.. something similar to what is below must have happened:

1. Either you were not subject to the AMT in 2008 and are now shocked to discover that you are subject to the AMT in 2009 and that the amount of aggregate credits is limited by the special rule of Sec. 26(a)(2) as amended by ARRA. In other words, you don't get the full benefit of all tax credits.

Or...

1. You were subject to AMT in 2008, anticipated AMT in 2009 but overlooked the fact that many credits are limited by the special rule and that ARRA did not make any exception in the AMT special rule for the Make Work Pay and Energy Efficient tax credits.

If you were subject to AMT in 2008 you and or your tax preparer should have been aware of the special rule that limits tax credits. If you were not subject to AMT in 2008 and you are in

2009, then obviously something changed to trigger the AMT and you are now discovering the special rule that limits credits.

As to the folks in D.C., the ones involved in drafting the tax legislation were certainly aware of the AMT implications as AMT has had to be patched every year. ARRA contains two patches for tax year 2009. (Extending special rule to 2009 and increasing the exemption.) They are also aware of the special rule as they continually draft legislation making certain tax credits exempt from the rule as Art Kamlet pointed out in his reply to your post.

I certainly understand your disgust with losing out on certain tax benefits that will probably cost you a $1000. The history of tax benefits in new tax legislation has always been blown out of proportion by the media and the Congressional sponsors. They are all aware of the AMT and how it impacts and limits certain tax benefits to certain taxpayers. The lesson here is to always crawl through the numbers and literature to see who does not benefit. E.g., the information on the Make Work Pay credit always said it lowers taxes for 95% of working Americans. No one ever asks: Who are the other 5%?

Just think what your tax bill would have been if ARRA hadn't extended the special rule to 2009 and increased the exemption amount.

The interaction between credits and AMT is usually found not on the AMT form, but rather on the individual credit forms, for example Line 16 of

2008 Form 8910.

-Mark Bole

The "making work pay" credit is a totally refundible credit for both regular taxes and for the AMT. So it is not affected by the AMT at all. It is however phased out for higher income taxpayers (over $150K AGI), disappearing entirely for AGIs over $190K MFJ. See your Schedule M.

As was I, it turns out.

It appears I was mistaken when I concluded that it was new tax credits -- making work pay and energy efficiency -- that prompted me to be subject to the AMT.

Spurred by your posting, I went back to my return and, as a test case, removed the energy efficiency and making work pay credits ($1,500 + $800) by zeroing out Form 5695 and Schedule M. My total tax immediately jumped by $2,300. So, apparently, these two tax credits *are* allowable under the AMT. If they weren't, then my tax due would have jumped by only $1,300 ($2,300 less the $1,000 in AMT I had owed).

I had concluded otherwise through carelessness. I had assumed that if the relevant tax credits offset the AMT, they would show up on Form 6251. I suspect this was an artifact of my memory of previous years' 1040 forms, where the AMT was pretty much the last thing on the form. Apparently, the "special rule" to which you referred prompted the IRS to reorder Form

1040 so that certain tax credits were applied after the AMT was calculated. Either that, or things were always that way and I was confused.

It would seem that my complaint is not with Congress's handling of these two credits in particular, but rather with the AMT in general. Even with this year's "patch," I am still being impacted by the AMT, even though I am not in an income bracket that the AMT was intended to impact (at least, not in my opinion; perhaps the Federal government disagrees!).

That's highly suboptimal.

Congress gives better benefits to people who (are more likely to) bribe it.

Seth

I presume your family has two adults also? (see next comment)

Now, as another test case, try removing 4 of your children. Did that make the AMT go away? Probably, although your total tax liability also probably went up.

Despite popular misconception about being "hit" by the AMT (a phrase that bugs me; as if it's somehow different from being hit by regular tax), it's not based on your income level. It's possible to be at a very high income level and still not owe any tax due to AMT. The actual AMT marginal tax rates are quite a bit below the top regular tax rates.

Rather, it is based on not allowing certain deductions and exemptions. In your case, assuming (from your email address) that you pay a non-trivial state income tax (MA), probably a hefty property tax that's been steadily increasing according to news reports, and have five kids, it's those things primarily that are driving AMT liability.

None of which make anyone feel any better about it, of course.

The unfairness of it all can work in the other direction, too. I have a client, also with 5 kids and what I would consider solidly middle-class income and wealth, who quit his salaried job a few years ago to start a business late in the year. Not surprisingly, the business had a modest loss that first year, but still nowhere near enough to offset his salary from the first part of the year. However, a previously unallowed passive loss carryover from rental property brought his income down low enough so that not only didn't he owe any tax, but he actually got over $4K from the government as a welfare payment (additional child tax credit).

-Mark Bole

(Point of information: I live in Brighton, not tony Brookline, despite the holdover email address. My property taxes, while not as low as they could be, aren't nearly as high as you might have thought.)

Those, and the fact that I made the "mistake" of giving a few thousand dollars to charity (under 2% of my gross income, which alas is all I could afford) this year. While the charitable donation deduction is a fringe benefit and not my primary reason for giving, the point of the deduction is to encourage people to give, and I'm not exactly encouraged by the knowledge that if I had given $0 to charity in 2009, my tax liability would be exactly the same.

If the purpose of the AMT is to collect taxes from people who are using tax dodges to avoid paying their fair share, then why is it structured in such a way that someone with a middle-class income, who pays a corresponding amount of state income tax and a relatively low property tax (we are NOT living in a mansion, believe me), gives little to charity, and takes only the number of dependent exemptions to which he is entitled, still ends up paying AMT?

Does anybody think this is the way things are supposed to work? If not, then why hasn't Congress fixed it for real?

Problems with AMT and other inane aspects of the Federal tax code would be greatly diminished if Congress people had to fill out their own tax returns without professional help. While I do not see Congress doing their own tax preparation soon, I would sure like to know which members of Congress do indeed fill out their own returns.

If push came to shove, I would be more likely to vote for one who does, presuming he/she is not a CPA or the like.

Is there any way of finding out such information?

Bill

Isn't a big part of the problem that AMT hasn't been indexed to inflation? So while AMT originally was intended to hit wealthy taxpayers, the middle class has slowly creeped into that income level.

There's a similar problem with the estate tax. It was targeted at millionaires, but middle class families that invest wisely can easily fall into it. But I think Congress has recently bumped up the size of the estate that it applies to.

The current estate tax, aka the "throw momma from the train" tax, has a one year rate of zero in 2010. Unless Congress does something, in

2011 the exemption returns to $1M per person, or $2M for a married couple who do some tax planning, with a rate of 45% above that. There's a variety of bills in Congress, most likely one returning the exclusion to the 2009 amounts of $3.5M per person or $7M per couple, and 45% of estates above that, or if the Republicans get their way $5M/$10M and 35%. I dunno about you, but I think anyone with $7M in assets is pretty rich and $10M is quite rich. Remember that there is a basis step-up, so that for assets passed to heirs and later sold, they only pay capital gains tax on gains above the value at the time of death.

The 2010 repeal also repeals the step-up, so estates are treated as gifts to the heirs, who might end up owing more in taxes due to gift tax or capital gains on appreciated assets.

There are some fairly screwed up taxes in this country, but assuming the Congress does what seems likely, the estate tax is not one of them.

R's, John

PS: If someone proposes to trot out the selling the family farm argument, I'd be interested to hear of any verified cases of a family farm that was actually sold to pay estate taxes, as opposed to sold because the heirs didn't want to be farmers.

The actual AMT marginal tax rate reaches 35%, not that much below the top regular tax rate for a taxpayer in a high-income-tax state.

Seth

As I suspect you know, it's all in one's definitions. Many believe in using a so-called "phantom" tax rate which is not only the actual tax rate but takes into account various limitations on deductions, lost credits, inclusions of otherwise untaxed income, etc.

In fact, the AMT itself is an example of such a "phantom" tax.

So yes, there is the matter of the AMT exemption phase-out over a certain income range. Really, it's not an apples-to-apples comparison, since for regular tax, taxable income is determined *after* applying deductions and exemptions, while AMTI is determined *before* applying the exemption.

Perhaps we agree that by incorporating a lot of "slop" into the lower end of the tax system (gross income vs. taxable income), lawmakers can easily adjust total taxes paid without technically changing the statutory rate.

-Mark Bole

Charitable deductions in cash from Schedule A are fully allowed for AMT, some donated property may have a different basis, however.

-Mark Bole

You obviously do not live nor own real estate in California. At the height of real estate prices in 2006, residental properties were easily $1,000.00/sq. ft., which means that a modest 2,000 sq. ft. house was $2M. With the 2011 reset, a couple's home by itself would consume their entire combined exemptions. 2,000 sq.ft. is below the median for houses out here. Many new homes are on the order of 5,000 sq.ft. for just the ground floor.

There are not any. Some anti-"death taxers" tried to find just such an example a few years ago and admitted defeat. They could not fine even one.

That "phantom" rate is also defined as: if you earn another $100, how much does your tax go up? So in that sense, it's the only real tax.

A tax that's 10% of "adjusted income" where "adjusted income" is defined as "4 times actual income" is a 40% tax. It's the supposed

10% that's phantom.

It's the marginal rate we're looking at, so "taxable income" doesn't matter.

They do that a lot, with varying effects.

Seth