Alternative Minimum Tax (AMT) / Hybrid Tax Credit Change

<div class='quotetop'>QUOTE(Kiloran @ May 17 2006, 01:57 PM) [snapback]256992[/snapback]</div>

Ok, one more time. (1) Tax cuts that affect only the lower wage earners: bad tax policy. (2) Tax cuts that affect all wage earners: good tax policy. Tax bill without AMT/credit fix: bad tax policy -- see (1). Tax bill with AMT/credit fix (or other changes to AMT so that a reduction in marginal rate has a real effect): good tax policy -- see (2).

If you want a good example as to how ridiculous AMT works here's one:
Two taxpayers. Both work in Philadelphia. One lives in Pennsylvania suburbs. One lives in New Jersey suburbs. Property taxes in New Jersey are anywhere between 2 to 4 times higher than in Pennsylvania. Because your average PA suburb isn't otherwise different than the average NJ suburb, housing prices in PA are higher than in NJ, but the monthly payments will be roughly the same. As a result, the PA homeowner's payment has more mortgage interest, but less property tax. The NJ homeowner's payment will have more property taxes but less mortage interest. Both taxpayers earn the same amount. Both taxpayers buy a Prius in the first quarter of 2006. However, since the mortgage deduction isn't affected by AMT, but the deduction for property taxes are eliminated, the PA taxpayer will pay less in federal taxes than the NJ taxpayer. The PA taxpayer will be able to use the hybrid tax credit, the NJ taxpayer will not. At the 28% federal AMT tax rate, the PA taxpayer will have more in his pocket after-tax as if he earned $4,375 more than the NJ taxpayer. Do you think it's fair for the NJ taxpayer to subsidize the PA taxpayer's income to the tune of $4,375 just because he lives on the other side of a river? Tell me again how AMT is suposed to equalize tax burdens and the new law undermines it?

 

<div class='quotetop'>QUOTE(Prizzle) [snapback]257022[/snapback]</div>

Folks seem to be objecting to the term "wealthiest" in relation to discussion of the AMT.
I suppose it would be more strictly precise to characterize them as "the group of taxpayers with the highest incomes".

If the change were to only allow the hybrid vehicle credit, I would have little objection.
The change they made in allowing all non-refundable credits, however, is very broad and undermines the AMT to its foundation; a gift which only benefits those in the group of taxpayers with the highest income levels.

 

<div class='quotetop'>QUOTE(Kiloran @ May 17 2006, 02:43 PM) [snapback]257031[/snapback]</div>

What part of this are you missing? If they don't make any changes to AMT, NO ONE WHO PAYS AMT WOULD EVER RECEIVE A TAX CUT!! Tax cuts only to lower wage earners is bad tax policy. Would you prefer they reduce the AMT rate? Talk about a gift! At least by allowing the tax credits they are getting the full benefit of whatever incentives they were trying to create in the first place. You like the hybrid tax credit; bully for you. I'm sure there are many others who will now receive tax credits that think it's stupid to give rebates to people buying foreign cars. You can't pick and choose like that and stand on any type of principle.

 

Most of what is wrong with the AMT could be fixed by simply indexing it to inflation.
The main mechanism by which the AMT works is the disallowal of many tax deductions and credits.
I don't view gutting the AMT by short circuiting its main tool as the reform the AMT legitimately needs.
However, this gift to those at the highest income levels is probably being spun as AMT reform.

 

C'mon wealthy Prius owners. Do you really begrudge paying a higher percentage of taxes than the people near the poverty line struggling daily just to put food on the table?

Sorry, the trickle-down effects of your spending does not count as charity.

 

<div class='quotetop'>QUOTE(Kiloran @ May 17 2006, 02:43 PM) [snapback]257031[/snapback]</div>

Sure these credits were for the rich:

Foreign tax credit- so you don't pay tax to two nations for same income, obviously fair
Child care credit-for the rich?
Elderly credit-income capped anyway
Education credit-income capped anyway
Retirement savings credit-income capped anyway
Adoption credit-income capped anyway
Qualified electric vehicle credit
Empowerment /community zone credit
Alcohol fuel credit
Renewable energy and coal credit
New York Libery Zone employee credit
Nonconventional fuel source credit

To name most of them. Look like those credits are just for the rich to you? Do you think taking away those incentives via AMT is a good idea? Fair to all? Good for the country?

 

<div class='quotetop'>QUOTE(Prizzle @ May 17 2006, 03:18 PM) [snapback]257067[/snapback]</div>

My objection is to the change in the AMT law which allows those in the highest income group to claim these credits to avoid AMT.
That change benefits only those in the highest income group.

 

<div class='quotetop'>QUOTE(electricity_guzzler @ May 17 2006, 02:57 PM) [snapback]257045[/snapback]</div>

Never said it was charity. Just that it's better tax policy if you're hell-bent on a tax cut in the first place. Like I said, you can make a good argument that giving tax rebates to foreign car buyers, regardless of income, isn't a good idea. The adding in of non-refundable credits doesn't eliminate AMT. There aren't many tax credits available to individual taxpayers in the first place. Plus, the idea is for individuals to spend money the government doesn't have to. Instead of a tax credit, the government could pay Toyota directly for every hybrid car it sells, but supply and demand woudn't necessarily translate that into a cheaper car to the consumer. The government could also spend the same money on pollution control enforcement, but we know that's not going to happen in this administration. If you're going to use the tax code to enact environmental policy, you might as well do it in a way that actually works! Same holds true for any other policy you're trying to enact using the tax code.

Look, bottom line here is that its an election year and the Republicans' ability to enact "tax cuts" without really cutting taxes (which is what they did by not adjusting AMT) doesn't cut it anymore. I agree it's pandering, but what else is new. As said before, true AMT reform would index it to inflation. Great idea. I'd save triple what I'd get back from the hybrid credit. So take your poision: (1) leave AMT alone and enact the rest of the tax bill and get disasterous economic results; (2) allow AMT payers to use tax credits like everyone else can and give some tax relief to some wealthier taxpayers, albeit less than the relief the rest of the population is getting or (3) really fix AMT and index it to inflation and slash taxes for the upper middle class. While personally I'd prefer (3), I'll settle for (2) to avoid the results of (1).

 

<div class='quotetop'>QUOTE(Kiloran @ May 17 2006, 03:24 PM) [snapback]257070[/snapback]</div>

Yep, let's take those alternative energy and ecnomic zone credits away from the very people who can and are making the investments to improve these situations. That'll show 'em.

I'm done.

 

<div class='quotetop'>QUOTE(Kiloran @ May 17 2006, 03:24 PM) [snapback]257070[/snapback]</div>

Allowing use of these credits don't allow those in the highest income group to avoid AMT. They are still paying a higher marginal rate on their income than those below. If you are going to have tax credits in the first place, why invalidate them to those who will use them? It sounds like your real beef is that they exist at all, which is a fine argument. Just don't confuse it with tax equity. It's apples and oranges. Tax deductions and credits are designed to influence behavior: we want people to own their houses, we want people to continue to live in cities where a wage tax is necessary, we want people to give to charity and so forth. The AMT wipes out all of those behavioral changes except home ownership. Remember, even if you don't pay AMT, your ability to take regular deductions are eroded the more money you earn. AMT was designed to make people who live off of capital gains and tax shelters to pay a more rational share of income tax without gutting the benefits of a reduced capital gains rate. It has since morphed into a device for Congress to pass tax cuts without actually cutting taxes. If AMT is so sacrosanct that allowing tax credits to be put to full use (rather than simply lowering the AMT rate a point or two) throws off your whole notion of tax equity, then you are using the tax code for redistribution of wealth, not maintaining the treasury or influencing behavior. Do you really want to go there?

Oh by the way, I happened to find this on cnn.com:

"A dual-income couple without kids and an AGI of $74,443 in Milwaukee can afford a median standard of living, according to the Tax Foundation report. That still puts the couple in the top 20 percent of taxpayers, giving them a tax liability of 8,081, or about 10.9 percent of their AGI (otherwise known as their effective tax rate).

To afford the same standard of living in Orange County, California, the couple would need an AGI of $100,079, putting them in the top 10 percent of taxpayers with a tax liability of $14,506. That represents 14.5 percent of their AGI.

And if they move to New York City, they'd need an AGI of $162,974, putting them in the top 3 percent of taxpayers and giving them a tax bill of $31,139, or 19.1 percent of their AGI."

Still think the "wealthest" taxpayers aren't paying their fair share (and yes, that is what you are saying when you say AMT relief is unfair because they benefit more)?

 

<div class='quotetop'>QUOTE(Prizzle @ May 17 2006, 12:32 PM) [snapback]257080[/snapback]</div>

When AMT was enacted in 1970, it affected 70,000 taxpayers. Not the middle class. If you want to index it to the top 150,000 wage earners, you'd have the effect intended at that time, adjusted for population growth.

It is a good thing that folks are buying gas-conserving, environmentally sounder cars. Encourage it. Folks earning 20k should exercise some caution in buying a 20K car (in my opinion) - they're not going to benefit from this credit. If you want to move the greatest number out of the SUV, you must target the middle / upper wage earner. Other credits may have more impact on other segments. I just don't see the 100,000,000 / year crowd buying Prii. In CA, we have a program to buy back gross polluters, so there's at least some benefit to the very low earners as well.

I'm still feeling guilty about buying a non-US made car. I buy US-made tennis shoes, 'fer goodness sake. I need my Prius to drive all over to find a US-made shoe - or belt - or shirt - or sock. Take a minute and think about whether you're a net importer or exporter in this economy, and why.

While i'm on this rant, Silicon Valley needs a shot in the arm. It's an engine which drives much of the exportable goods and services for the US, and it is in trouble. Jobs are still going offshore. Great engineers are having nightmarish times coming here and staying here from abroad (and stealing other countries brightest is still an outstanding idea). Reform for ISO / NQO options is sorely needed, unless the expectation for working 100 hour weeks for years is to buy a condo out of state. IRS ruling 409a alone will kill the startup economy. The semiconductor industry has largely gone fabless here, and that's like saying "gee, it's hard building dams, let's just import all the water."

-- rick

Lee, you started this!

 

<div class='quotetop'>QUOTE(monkeypox @ May 16 2006, 06:13 PM) [snapback]256527[/snapback]</div>

You will get a tax credit - assuming no "special cases" apply in your case.

 

Our tax policies in this country are totally screwed up. There should be no federal tax credit for a prius! Do you realize that our government is subsidizing the purchase of a foreign car - this makes no sense. As Americans we should want to help our domestic industry and its employees, not foreign companies and foreign workers.

As for taxes, don't get me started. Our progressive system is far from it. If the tax rate was the same for everyone that is progressive - those that make more pay more. When you have higher rates for higher income you make it totally regressive. It kills the incentive to make more and expand the economy. I own a business, and have thought of buying another, but it is not worth my effort. When I look at what I will pay in federal, state and local income taxes, property taxes, workers comp (a tax) social security and medicare tax, capital gains tax, and other fees, permits, licenses, etc... it just is not worth the risk when I could take the same money and invest it either tax free or take a little more risk and pay capital gains at only 15%.

Our system needs to start favoring what many of you call wealthy, or there won't be many jobs left for the rest of you. The "wealthy" are the ones that create jobs and enable the bulk of the people to earn a living. Help support the wealthy!

 

<div class='quotetop'>QUOTE(monkeypox @ May 16 2006, 03:13 PM) [snapback]256527[/snapback]</div>

There is no easy answer.

Contrary to some of the posts and discussions, it appears that the legislation did not override the basic legislation for the hybrid credit that basically allows the credit for the amount between your regular tax and the AMT computed "tentative minimum tax." This is because the hybrid credit is not a "nonrefundable personal tax credits."

What the legislation does do, is increase the amount of the deduction in computation of the tentative minimum tax by about $4,500 for a joint filing. (This is not addressed by the CCH excerpt below.)

Here is what CCH says about the legislation, as it relates to the nonrefundable personal tax credits being allowed:

"NEW LAW EXPLAINED

Nonrefundable personal credits allowed against regular tax and alternative minimum tax liability for tax years beginning in 2006. --For tax years beginning in 2006, the nonrefundable personal tax credits are allowed to the full extent of the taxpayer's regular tax and alternative minimum tax liability. For this purpose, the regular tax liability is first reduced by the amount of any applicable foreign tax credit (Code Sec. 26(a)(2), as amended by the Tax Increase Prevention and Reconciliation Act of 2005).

Comment:

This extension provision does not apply to the personal use portions of the nonrefundable tax credits for alternative motor vehicles and alternative motor vehicle refueling property. The personal use portion of these credits, therefore, is limited to the excess of the taxpayer's regular tax liability, reduced by all other nonrefundable credits plus the foreign tax credit and the credit for qualified electric vehicles, over the tentative minimum tax (Code Secs. 30B(g)(2) and 30C(d)(2))."

Seek a tax advisor.

Also, by postponing certain deductions, such as property taxes and state income taxes to 2007, you can increase potentially the gap between the regular tax and the tentative minimum tax.

George

P.S. This post has more information on this issue prior to the legislation that give back ground on how it works.

http://priuschat.com/index.php?s=&showtopi...ndpost&p=240972

 

Back to the AMT, some of these "wealthy" (on paper at the time they exercised their options and held the stock) got screwed during the .com crash. They made a bad investment choice, but got hit REALLY hard because of the AMT.
http://news.com.com/Options+dream+turns+to...7_3-255818.html

I have some nearly worthless options and a bunch of underwater options w/my company. I would never exercise and then hold the stock for tax reasons because of the above risk.

 

<div class='quotetop'>QUOTE(cwerdna @ May 18 2006, 01:05 AM) [snapback]257395[/snapback]</div>

Well, then they aren't wealthy any more.

This points out the sloppy terminology the media consistently use when discussing income taxes. When they write "the wealthy", they actually mean "the people with high taxable incomes".

Some people who are wealthy have very low taxable incomes and so pay little tax. Examples: those who have no current employment and whose wealth does not produce much taxable income.

Some people who have very high taxable incomes, and pay high taxes, have little or no wealth or even negative net worths. Examples: people just out of professional school and earning incomes as physicians, attorneys, or investment bankers, but with large educational debts.