Comments on the Alternative Minimum Tax

Last night I had a client consultation, where again, AMT was a concern.  I remain reluctant to give advice around this subject due to its overwhelming complexity.  It seems to increase confusion, rather than confidence.  I have attached a couple of articles that will help provide some insight; in addition, below is a thread posted earlier this month from Todd Ballenger, who leads our national mentoring program.  I am currently looking to do an interview with a national expert on this topic, which I'll post as a podcast.  Make sure you sign up in the right column to receive updates.  Also, please email any questions or comments you have on this subject to Kyle@ValuesBasedLending.com.  We've talked about AMT, and how it causes a loss of the Property Tax and Equity Line tax benefits for those who trigger it - the House is working to Repeal AMT and also take another stab at a simplified Tax files based on 2 tax rates at 10% and 25%, which are pretty close to the effective tax rates that are paid if you look at the income that is currently straddled across 6 different brackets ( you might pay X% on this income, then X% on the next level, then X% on the next) and it works out to between 10% and 25%.  If something like this passes, we'd calculate EPR at Nominal rate X 10% or 25% depending on their income level, etc.  At a minimum, expect some big changes in 2009 - and expect us to spend much of March on the asset side of the balance sheet when we move from a lending focus to a wealth focus.

Out With the AMT:  House bill would repeal AMT, create ‘simplified tax’

By Melanie Waddell

October 12, 2007

Thirty million Americans would be saved from the Alternative Minimum Tax (AMT) under a bill that was introduced by House Republicans October 11, its sponsors say. The bill, The Taxpayer Choice Act, would repeal the AMT and give taxpayers a choice of how they wish to pay federal income taxes: under the current tax code or through a “simplified tax.” The sponsors of the bill are Representatives John Campbell (R-California), Jeb Hensarling (R-Texas), and Paul Ryan (R-Wisconsin).

The simplified tax would use two income tax rates: a 10% rate on taxable income of $100,000 for joint filers and $50,000 for single filers, and a 25% rate for income above $100,000, says Tim Flynn, a House Budget Committee staffer. The current tax code uses six tax rates, so the bill’s simplified tax of two rates is an attempt to “clean up” the tax system and make it easier—and less costly—for individuals to prepare their taxes, Flynn says.

Speaking of taxes, regardless of who wins the White House in 2008, taxpayers can expect a major tax bill to be introduced in 2009, says Randy Hardock, an attorney with Davis & Harman in Washington. “Every President does a major tax bill in their first session,” he said at T. Rowe Price’s Investment Symposium in Baltimore October 9. “The 2009 tax bill will include major reshuffling in the tax burden and major tax increases.”

QUICK FACTS ON AMT:

From IRS Publication 17 Chapter 3

This is only part of chapter 3.

Phaseout of Exemptions

The amount you can claim as a deduction for exemptions is phased out once your adjusted gross income (AGI) goes above a certain level for your filing status. These levels are as follows:

Filing Status	AGI Level  Which Reduces  Exemption  Amount
Married filing separately	$ 107,025
Single	142,700
Head of household	178,350
Married filing jointly	214,050
Qualifying widow(er)	214,050

If your AGI exceeds the level for your filing status, use the Deduction for Exemptions Worksheet in the instructions for Form 1040 to figure the amount of your deduction for exemptions.

You must reduce the dollar amount of your exemptions by 2% for each $2,500, or part of $2,500 ($1,250 if you are married filing separately), that your AGI exceeds the amount shown above for your filing status. If your AGI exceeds the amount shown by more than $122,500 ($61,250 if married filing separately), the amount of your deduction for exemptions is reduced to zero.

From IRS Publication 17 Chapter 31

This is the entire chapter 31 including a worksheet at bottom.

31. Limit on Itemized Deductions

Table of Contents

    Introduction <http://www.irs.gov/publications/p17/ch31.html>

    Useful Items - You may want to see: <http://www.irs.gov/publications/p17/ch31.html>

    Are You Subject to the Limit? <http://www.irs.gov/publications/p17/ch31.html>

    Which Itemized Deductions Are Limited? <http://www.irs.gov/publications/p17/ch31.html>

    Which Itemized Deductions Are Not Limited? <http://www.irs.gov/publications/p17/ch31.html>

    How Do You Figure the Limit? <http://www.irs.gov/publications/p17/ch31.html>

o    Example <http://www.irs.gov/publications/p17/ch31.html>

Introduction

This chapter discusses the overall limit on itemized deductions on Schedule A (Form 1040). The topics include:

    Who is subject to the limit,

    Which itemized deductions are limited, and

    How to figure the limit.

Useful Items - You may want to see:

Form (and Instructions)

    Schedule A (Form 1040)

Itemized Deductions

Are You Subject to the Limit?

You are subject to the limit on certain itemized deductions if your adjusted gross income (AGI) is more than $142,700 ($71,350 if you are married filing separately). Your AGI is the amount on Form 1040, line 37.

Which Itemized Deductions Are Limited?

The following Schedule A (Form 1040) deductions are subject to the overall limit on itemized deductions.

    Taxes-line 9.

    Interest-lines 10, 11, and 12.

    Gifts to charity-line 18.

    Job expenses and most other miscellaneous deductions-line 26.

    Other miscellaneous deductions-line 27, excluding gambling and casualty or theft losses.

Which Itemized Deductions Are Not Limited?

The following Schedule A (Form 1040) deductions are not subject to the overall limit on itemized deductions. However, they are still subject to other applicable limits.

    Medical and dental expenses-line 4.

    Investment interest expense-line 13.

    Casualty and theft losses from personal use property-line 19.

    Casualty and theft losses from income-producing property-line 27.

    Gambling losses-line 27.

How Do You Figure the Limit?

If your itemized deductions are subject to the limit, the total of all your itemized deductions is reduced by the smaller of:

    3% of the amount by which your AGI exceeds $142,700 ($71,350 if married filing separately), or

    80% of your itemized deductions that are affected by the limit. See Which Itemized Deductions Are Limited, earlier.

Before you figure the overall limit on itemized deductions, you first must complete Schedule A (Form 1040), lines 1 through 27, including any related forms (such as Form 2106, Form 4684, etc.).

The overall limit on itemized deductions is figured after you have applied any other limit on the allowance of any itemized deduction. These other limits include charitable contribution limits (chapter 26), the limit on certain meals and entertainment (chapter 28), and the 2%-of- adjusted-gross-income limit on certain miscellaneous deductions (chapter 30).

Itemized Deductions Worksheet.   After you have completed Schedule A (Form 1040) through line 27, you can use the Itemized Deductions Worksheet in the Form 1040 instructions for Schedule A to figure your limit. Enter the result on Schedule A (Form 1040), line 28. Keep the worksheet for your records.

You should compare the amount of your standard deduction to the amount of your itemized deductions after applying the limit. Use the greater amount when completing Form 1040, line 39. See chapter 22 for information on how to figure your standard deduction.

Example

For tax year 2004, Bill and Terry Willow are filing a joint return on Form 1040. Their adjusted gross income on line 37 is $259,600. Their Schedule A itemized deductions are as follows:

Taxes-line 9		$17,900
Interest-lines 10, 11, and 12		45,000
Investment interest expense  -line 13		41,000
Gifts to charity-line 18		21,000
Job expenses-line 26		17,240
Total		$142,140

The Willows' investment interest expense deduction ($41,000 from Schedule A (Form 1040), line 13) is not subject to the overall limit on itemized deductions.

The Willows use the Itemized Deductions Worksheet in the Schedule A (Form 1040) instructions to figure their overall limit. Their completed worksheet is shown as Table 31-1.

Of their $142,140 total itemized deductions, the Willows can deduct only $138,633 ($142,140 - $3,507). They enter $138,633 on Schedule A (Form 1040), line 28.