Spring Issue of Health Matrix, the Journal of Law-Medicine out of Case Western, had a great piece on Obamacare and the legality and eligibility of certain tax credits. The abstract is below. I advise that you read the piece in its entirety.…
The IRS is reminding taxpayers and Congress alike that if the annual “AMT patch” isn’t renewed before the end of the year, millions of taxpayers (28 million) would be on the hook for thousands more per person in tax payments.
But we need more than just a “patch”. We need to eliminate the AMT from the tax code. Here’s why:
The Alternative Minimum Tax (“AMT”) presents hardships to the practitioner as well as the taxpayer who prepares his own return by, as its name implies, imposing a second tax calculation mechanism on taxpayers. It serves virtually no useful purpose, other than the raising of an ever-increasing amount of tax revenue. But it has become very clear in recent years that this AMT tax revenue is not coming from just the taxpayers who were the intended targets of this tax.
However the AMT was seriously flawed from the outset. Instead of focusing on these loophole type preferences (which would have limited the tax to a very small number of tax law “abusers”), the law that was passed included items that were not loopholes at all. A convoluted formula compares the differences between income and deductions to determine who falls under the guidelines.
- Treating state and local taxes as a preference
- Treating miscellaneous deductions as a preference
- Allowing lower exemptions than the regular tax.
Each of these, however, can be quickly shown as inappropriate factors with which to base a tax system intended to just make sure everyone pays a “fair share” of tax.
- State and local taxes are hardly a loophole. The taxes exacted by state and local governments are hardly “voluntarily” paid by taxpayers in an attempt to avoid paying federal taxes.
- Miscellaneous deductions is the category of deductions that consists primarily of expenses incurred to earn income that is subject to tax. It includes unreimbursed employee expenses, investment expenses, etc. This is the most basic and important deduction needed to have a truly fair income tax system. For example, if an individual pays a lawyer a fee for collecting back wages, the legal fee is a miscellaneous deduction. If an individual pays the lawyer $300 for collecting $1000 of back pay, netting $700, the AMT would tax the individual on the full $1000.
- The exemption available under the AMT tax system is a fixed dollar amount which, unlike exemptions and standard deductions under the regular tax system, is not indexed for inflation. Furthermore, it is phased out entirely over certain income levels. And each year Congress has to approve an annual “patch”, which raises the threshold for inflation, in order to raise the exemption limits of the tax so that less wealthy taxpayers won’t be subject to the AMT.
It must be noted that the annual AMT patch is not a tax cut at all, but merely the avoidance of a massive tax increase on millions of middle-income taxpayers’ families. Congress likes to point to the patch as some major revenue loss, had the AMT been applied to those families, as an excuse to raise to raise taxes in order to offset this “potential missing tax revenue”.
The AMT in its present form has no place in tax law. The AMT does not serve the purpose for which it was intended and functions in a most inequitable manner while adding enormous compliance burdens. It should therefore be changed to eliminate the adjustments for state and local taxes and miscellaneous deductions, update its rates, and modify its exemption — or else the AMT needs to be eliminated completely.
crossposted at redstate.com/alanjoelny
While Congress debated the merits of the two-month extension of the payroll tax holiday, no one mentioned the devasting economic impact this legislation will have on our small and large businesses, nor the tens of millions of dollars wasted by the Senate to come up with this hiccup.
Our Senate did a disengenous job at compromise merely to enable them to go home on vacation. There is absolutely no consideration of the havoc being wreaked on our economy and our businesses due to the instability that comes with not knowing what the tax rate will be in the long run. A one year extension is bad enough – does anyone seriously think that businesses will hire or that individuals will spend just because of another even a one year 2% reduction? But extending for only two months is far worse.
Even now, these companies with payroll will have to make changes and adjustments. They have been waiting with uncertainty as to how to proceed in the coming year – and we are mere days away from 2012. Forms cannot be printed, and when they are printed, around-the-clock overtime will result. The same is true with respect to accounting software. And how can a business institute any new changes to the tax schedule in a proper and timely matter? It’s ludicrous, not only regarding the nightmare of compliance and calculation, but also the inefficiency from all the extra man hours spent.
As a lifelong CPA, I can assure you that such a short-lived extension in the middle of tax season creates the absolute certainty that mistakes will be made– lots of them. Mistakes mean IRS penalties. The financial and wasted cost from our government sending out notices, following up, making corrections, and dealing with taxpayers fighting the penalties is a gross misuse of time and resources, all because Congress is incompetent and short-sighted. And then Congress and the IRS will spend more time writing regulations explaining the extent to which these penalties are to be abated.
More money will be spent than saved, with higher costs endured by our businesses; this extension is a sham.
A fresh perspective on the myth and the reality of income inequality in the United States.
Ronald Schmidt, professor of business administration at the Simon Graduate School of Business at the University of Rochester, says analysis of IRS data shows a “movement toward less inequality.” Schmidt talks with Bloomberg’s Ken Prewitt and Tom Keene on Bloomberg Radio’s “Bloomberg Surveillance.” Listen here to Ron Schmidt’s interview this morning.