Tax surprise: AMT
Apr. 7th, 2004 01:05 am![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
javasaurusYes, I'm ranting about the AMT again. And maybe I should keep doing so until it goes away. Unfortunately, not many people read my LJ, so please, feel free to pass along what I'm about to say.
The AMT
Most people don't know this, because until now, it hasn't affected them. The federal government requires that you compute your income taxes twice, once with the traditional 1040, Schedule A, etc. The second way is the AMT, or Alternative Minimum Tax. You have to pay whichever is higher. Until recently, nearly everybody has paid the traditional tax amount, because it has been significantly higher, and the AMT a painful, useless form to simply forget about. But no more! As you are working on your taxes this year, make sure to go through the AMT worksheet carefully, or you could get a very nasty surprise.
What is the AMT? Well, about thirty or so years ago, the American public discovered that a small number (155) of really rich families paid no tax at all. Gotta love those shelters, eh? So the AMT was put in place to make sure everybody paid something. It was aimed at the rich and at certain tax shelters that didn't affect most people. However, the law didn't include a provision for inflation, and as middle-class has meant higher and higher wages, millions of people are finding themselves hit by the AMT this year, and the number will increase exponentially until Congress does something about it. To be fair, Congress has patched the AMT law a few times over the years, aiming it at higher income levels. However, the most recent patch is due to expire, and a solid chunk of people will be caught unawares.
How does the AMT work? Well, take your gross income, apply a very few deductions (most deductions from the 1040/Schedule A don't apply!), subtract a standard allowance (58000 for marrieds), and you owe about 26% of what's left. The rate goes up and the allowance goes down if you make gobs of money. It's estimated that 1/10 of families making between 100k and 200k will get hit this year, and up to 1/2 of families making more than that. By 2010 (if not fixed) about 97% of families making more than 75k will be hit. (Estimates from Smart Money magazine, April 2004 issue).
Some specifics: the 58000 standard allowance gets reduced to 45000 after this year, if not re-patched. Some unallowed deductions include the standard exemptions for self, spouse, kids, etc.; state and local income taxes; property taxes; and some medical expenses. An important one for some people: stock options are taxed by AMT when they are exercised, not when they are cashed in. Exercise is not always good for you, eh?
Some families with gross incomes substantially less than 100k are being hit this year due to the stock options issue. Nobody is completely safe, so don't ignore this year's AMT worksheet on your tax forms. The IRS certainly won't, and if you screw it up, you may be held responsible for late fees and interest.
The AMT
Most people don't know this, because until now, it hasn't affected them. The federal government requires that you compute your income taxes twice, once with the traditional 1040, Schedule A, etc. The second way is the AMT, or Alternative Minimum Tax. You have to pay whichever is higher. Until recently, nearly everybody has paid the traditional tax amount, because it has been significantly higher, and the AMT a painful, useless form to simply forget about. But no more! As you are working on your taxes this year, make sure to go through the AMT worksheet carefully, or you could get a very nasty surprise.
What is the AMT? Well, about thirty or so years ago, the American public discovered that a small number (155) of really rich families paid no tax at all. Gotta love those shelters, eh? So the AMT was put in place to make sure everybody paid something. It was aimed at the rich and at certain tax shelters that didn't affect most people. However, the law didn't include a provision for inflation, and as middle-class has meant higher and higher wages, millions of people are finding themselves hit by the AMT this year, and the number will increase exponentially until Congress does something about it. To be fair, Congress has patched the AMT law a few times over the years, aiming it at higher income levels. However, the most recent patch is due to expire, and a solid chunk of people will be caught unawares.
How does the AMT work? Well, take your gross income, apply a very few deductions (most deductions from the 1040/Schedule A don't apply!), subtract a standard allowance (58000 for marrieds), and you owe about 26% of what's left. The rate goes up and the allowance goes down if you make gobs of money. It's estimated that 1/10 of families making between 100k and 200k will get hit this year, and up to 1/2 of families making more than that. By 2010 (if not fixed) about 97% of families making more than 75k will be hit. (Estimates from Smart Money magazine, April 2004 issue).
Some specifics: the 58000 standard allowance gets reduced to 45000 after this year, if not re-patched. Some unallowed deductions include the standard exemptions for self, spouse, kids, etc.; state and local income taxes; property taxes; and some medical expenses. An important one for some people: stock options are taxed by AMT when they are exercised, not when they are cashed in. Exercise is not always good for you, eh?
Some families with gross incomes substantially less than 100k are being hit this year due to the stock options issue. Nobody is completely safe, so don't ignore this year's AMT worksheet on your tax forms. The IRS certainly won't, and if you screw it up, you may be held responsible for late fees and interest.
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no subject
Date: 2004-04-07 04:33 am (UTC)geeks were devestated...
Date: 2004-04-07 06:16 am (UTC)In February the company and stock tanked, they were out of a job, and the stock options were worthless.
In April, the AMT said they owed about $10 to $20 THOUSAND.
The AMT (and the IRS on appeal) made no allowances for the bombs. These geeks now have auto-withdrawels on their paychecks for the next 20 years to cover it all...
...and on the AMT, those tax payments are ALSO not deductable (they are on a 1040), so they have to continue to be ultra careful not to qualify for AMT.
Re: geeks were devestated...
Date: 2004-04-09 01:47 pm (UTC)But, wait - I thought it cut in with a certain number of deductions, rather than a set amount of worth?
a bit o' related humor
Date: 2004-04-07 07:44 am (UTC)no subject
Date: 2004-04-07 02:15 pm (UTC)