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AMT Update: Are you Ready For This?

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Diane Kennedy

Bronze Contributor
Aug 31, 2007
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I've been gone a few days and just landed at my hotel to a whole bunch of urgent messages from back East last night.

Remember when I said that 10 million more Americans were going to be subject to AMT? Well, I was wrong. It looks like Congress is going to adjourn WITHOUT renewing the AMT bandaid from last year.

That means that it will be somewhere between 19 million and 23 million more Ameicans that are subject to AMT this year.

If you make less than $45,000 (married, filing jointly) or $33,750 (single), you have an exemption. Otherwise, the chances are good that you'll not be paying the regular tax bracket without deductions for state taxes, mortgage interest, medical deductions, accelerated depreciation and many others. Instead you'll be paying a flat rate of either 26% or 28%.

There will be NO special long-term capital gains tax rate. You'll lose most of your itemized deductions.

The word going out to CPA societies this next week will be to tell clients that they should earmark some extra cash for their taxes this year. You probably haven't paid enough in or enough in estimated taxes. Or, if you're used to getting a refund, you most likely won't get as much.

If your income is close to $50K, the impact isn't as big. But for those of you with higher income and especially if this was a big capital gains year, look out.

I'll be blogging about this daily as we get more reports. PLUS look for more information at my website (not sure if I'll be able to post here) on strategies to reduce the effects. It's the number one priority this week at my CPA firm and with our research department.
 

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John

Contributor
Sep 18, 2007
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No long-term capital gains rate? Ouch! Looks like MJ may have sold his business just in time!

This could really cream me this year because I may be closing on the sale of a business. I'm also holding some stock that's gone up pretty nicely. I've been waiting to sell so I'll have held it for a full year to get the long-term rate.

Do you have any thoughts on the likelihood of getting the band-aid back for 2008? Would it be worthwhile to defer any large capital gains until after the new year?
 

Nate

New Contributor
Read Millionaire Fastlane
Sep 24, 2007
75
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Utah
I'm confused, is this something that is happening just this year in order to fix the AMT situation... then things go back the next year? Is that what the "band-aid" is? And where is your blog Diane?
 

Diane Kennedy

Bronze Contributor
Aug 31, 2007
795
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Nate:

In 2006, AMT hit about 3 million taxpayers. It would have been much worse, but Congress enacted a change, for one year only, that saved a lot of people from this tax .

A lot of people assumed (me included) that Congress would extend the change for 2007 tax year as well. They didn't! And, it looks like with just a few weeks left that they are simply not going to handle it.

That's why it's so important for anyone making over $50K to make sure they check in with their CPA as to their personal situation.

My website is TaxLoopholes - you can find my blog on the button on the bottom.

I saw in another post that you wished we'd get flat tax....this is really a flat tax, but it's too high and too sudden for any real planning.

Like MJ knows already, any sales this year (2007) are likely to get hit by AMT. So the lower long-term capital gains rates you might be expecting are gone.

As to whether they'll fix it next year. I don't know. Apparently AMT is expected to create another 1 TRILLION dollars in tax revenue. With a budget out of balance, AMT is awfully compelling. And without getting into a bunch of political commentary, I suspect that new agendas in the White House aren't going to be driven by protecting tax loopholes for business owners and real estate investors.
 

Nate

New Contributor
Read Millionaire Fastlane
Sep 24, 2007
75
2
21
Utah
So without me knowing all the details... people got in over their heads... and the government is coming to the rescue. However, knowing that there is no such thing as a free lunch, this is going to be paid for by those who make more than 50k a year.

How exactly is this Robin Hood scenario going to play out? I mean, in what way will these innocent bystanders have to pay for it? Is there some new tax for the year, or are their tax deductions from the past that won't be effective this year? Does it only effect home owners?

I would appreciate any details... and then I'm going to go punch the guy I carpool with in the nose because he was bragging all day yesterday on how he had his bacon saved by th blessed U.S. government.

taxloopholes! What a domain name. A good one like that had to have been registered back in '99 or something.
 

Diane Kennedy

Bronze Contributor
Aug 31, 2007
795
211
49
So without me knowing all the details... people got in over their heads... and the government is coming to the rescue. However, knowing that there is no such thing as a free lunch, this is going to be paid for by those who make more than 50k a year.

How exactly is this Robin Hood scenario going to play out? I mean, in what way will these innocent bystanders have to pay for it? Is there some new tax for the year, or are their tax deductions from the past that won't be effective this year? Does it only effect home owners?

I would appreciate any details... and then I'm going to go punch the guy I carpool with in the nose because he was bragging all day yesterday on how he had his bacon saved by th blessed U.S. government.

taxloopholes! What a domain name. A good one like that had to have been registered back in '99 or something.

Okay, Nate, if you're going to punch a guy, please don't do it while he's driving. CA roads are already scary enough.

AMT has been around a long time. It was first put in place so that rich had to pay something. The problem is that over the years the regular income brackets have adjusted for inflation, but AMT has not. Used to be $50K/year was rich...now it's not.

In a nutshell, that's why we are where we are. Add to that the fact that AMT is confusing and not a lot of people understand it and that's why there is no public outry. And now we have a budget that's out of balance PLUS millions and millions of bad debt for real estate. So, there is a real economic reason to not change something that not too many people are talking about. (ie...the squeaky wheel gets the grease)

On the domain name - yes, I did buy it a while ago. But, I'm still buying names. It's amazing what you can find. Some of them are taken, but a few hundred bucks and you can pick them up. I'm really taking MJ's earlier post about buying names to heart. But, I'm only buying stuff that I plan to turn into an actual working website of some type. That's just my game plan. I'm fairly new to that type of business and am learning it.
 

MJ DeMarco

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Yea, safe to say I'm gonna get killed. Ill update after I speak to my CPA.

I spoke to my CPA and he said I my effect by AMT will be marginal, if any. When I asked how, he said because I am likely to have very high earnings ($1mm+) which will be subject to normal 35% rates. Whew!
 

Diane Kennedy

Bronze Contributor
Aug 31, 2007
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MJ, that makes sense. I think what's going on is that you sold near the end of the year, so you had a lot of income from the business already (taxed at ordinary income tax rates ie...35%). So, the percentage of income from capital gains for you wasn't as high.

Interestingly enough, contrast that with someone who sold a capital gains asset at the beginning of the year and didn't have any ordinary income. They'd be expecting to pay 15% and because that was the bulk of their income, would get AMT at 28%.

In your case the 35% on the ordinary income negated the impact of AMT on capital gains.

I bet that explanation is clear as mud, for other people reading. But, does that sound right MJ?
 

MJ DeMarco

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MJ, that makes sense. I think what's going on is that you sold near the end of the year, so you had a lot of income from the business already (taxed at ordinary income tax rates ie...35%). So, the percentage of income from capital gains for you wasn't as high.

Interestingly enough, contrast that with someone who sold a capital gains asset at the beginning of the year and didn't have any ordinary income. They'd be expecting to pay 15% and because that was the bulk of their income, would get AMT at 28%.

In your case the 35% on the ordinary income negated the impact of AMT on capital gains.

I bet that explanation is clear as mud, for other people reading. But, does that sound right MJ?

You've got it absolutely correct, just explained it better! :thankyousign:
 

sulli

New Contributor
Jul 26, 2007
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Wow, what an important consideration. Early vs. Later.
 

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