Thursday, June 10, 2010

The Next Tax Bill Starts with the 'AMT'

The most potent political ‘weak point’ in all of these Bush tax cuts is the AMT provision. And that is where, what and how the next tax bill will start because it has to.

The ‘Alternative Minimum Tax’…an oxymoron if there ever was one.

There is no ‘alternative’ to paying it.  It is sort of like the payroll tax in that it is a set tax that you can not get around in any way, shape or form once you enter its dangerous territory, namely income between $150,000 and $415,000 per year.

And there is hardly any ‘minimum’ to it in terms of income level that you can earn before being subject to the AMT anymore. According to some tax experts, depending on the mix of tax deductions a person has for the year, the AMT could affect people making as low as $75,000 in 2011. That seems pretty low for what started out as a ‘millionaire’s tax’, don’t you think?

The AMT was passed in 1969 after it was discovered that 155 high-income taxpayers had been able to avoid paying any taxes the previous year. They were smart enough and had sufficient resources to be able to pay the very best tax accountants and lawyers to find loopholes in the general tax code to reduce their tax exposure to zero.

There is nothing ‘illegal’ about that, is there? In fact, it seems like almost some sort of patriotic duty to limit your tax payments to any sort of concentrated taxing authority, doesn't it?  Or was the Revolution fought against the capriciousness of King George III primarily for another reason of which we are not fully aware?

Anyway, without some sort of comprehensive reconciliation tax bill this year to raise the AMT threshold to a higher inflation-adjusted level by this December 31, 2010, 27 million more taxpayers are going to go stark-raving mad next year when their tax bill for calendar year 2011 increases by, let’s say for the sake of argument, $2500 and they have not set aside the money for it by April 15, 2012.

The 'AMT Trap' virtually guarantees that something has to be done this year.   When you make 27 million people furious, including maybe you for the first time, in one fell swoop,  that is how revolutions start…marching in the streets with tar-and-feathering sort of stuff.

For some reason, the Obama White House and the Democrats who control Congress have paid scant attention to the expiration of the Bush tax cuts by the end of the year. They have said they want to keep all the tax breaks that help people making under $250,000/year, but until they pass a bill, everyone is at risk of losing their tax cuts, including people making under $250,000.

Since there has been no budget resolution passed yet by Congress, there is no real framework for a reconciliation bill to be passed later this year. Budget reconciliation bills normally would allow amendments on AMT and other Bush tax cut provision extensions. Congress has already circumvented ‘normal’ budget proceedings in Congress this year by invoking the ‘reconciliation’ process to clean up certain parts of the health care bill.

Will they now attempt to break all records for ‘normal’ Congressional procedures by trying to pass 2 reconciliation bills in the same year for the first time ever?

Since no tax bill has been drafted up yet in Congress, any and all options are still 'on the table', according to one staff person. There is an incredible tension building between dealing with the enormous debt by allowing the tax cuts to expire and not wanting to have millions of people go crazy by paying much higher taxes next year.

There is some talk on Capitol Hill about extending all of the 'middle-class'  tax cuts for 1-2 years but not the high-income tax cuts. Talk about confusion at tax time!  That would never work, we don't think, simply due to the accounting procedures and the new forms that would be necessary.

We think a more logical process would have Congress taking up an typical ‘tax-extender’ bill, such as an extension of the research-and-development tax credit, which usually is a vehicle for mischief and special favors at the end of a Congressional session near Christmas time.

The tax bill will probably be presented after the elections in November and voted on and passed near the end of the year at Christmas time. Why make everyone mad before the elections?  Especially everyone who gets socked with the AMT or who loses their tax reductions.

The majority party in charge of Congress 'adds-on' to the bill as if they are 'gifts' for favored sectors of the economy and people. Hence the name, 'Christmas tree amendments'.  Democrat congressional leaders and staff will add-on amendments they like and not add-on extensions to the Bush tax cuts they hate.

Namely, anything that ‘looks’ like it is an extension to help middle-class taxpayers will be included in the bill.  Anything that ‘appears’ to be ‘sticking it to the rich’ or those making over $250k in income will be excluded from the extensions.

But what happens when an estate sells a family farm or small business for $2 million on January 2, 2011?  Try to imagine explaining to the 5 remaining family members why the government has to take 55% of the second million of net worth or $550,000 because estate taxes reverted back to their pre-Bush rates and thresholds 2 days before closing.

Why will there be such selective tax cut extensions? Because the Democrats will be in power until January 2, 2011 when the new Congress takes over. They can do a heckuva lot with a tax bill in a lame duck session this November/December; don’t let anyone kid you that they can’t. It will take years to unwind any tax changes, especially with a President in the White House who will not sign anything a new Republican Congress might pass in 2011.

We think the AMT thresholds will be raised....somewhat.  As budgeteers, we can see where committee staff might suggest that a 'few million extra' new higher-income taxpayers will be ‘allowed’ to pay the dreaded AMT who are on the ‘upper end’ of the middle class…however that is defined. If you are making anything over $75,000 income, you should be concerned because you could be at risk of being included in the new pool of AMT victims.  All the staff has to do is raise the thresholds below the rate of inflation and they will pick up millions of new AMT payers.

Revenues expected from the expiration of the Bush tax cuts are already built-in to current budget estimates. If the tax cuts are not allowed to expire, (think ‘double negative’), meaning the expiration of the tax cuts is ‘repealed’, US deficit numbers going forward worsen by between $200-300 billion per year.

Here are some other tax changes that will happen, according to some staff close to the process on Capitol Hill, effective January 1, 2011:

  1. The top rate on ordinary income will revert back up to 39.6%.
  2. The 10/15/25/28% income tax rates and income threshold levels will stay the same as today.
  3. The top tax rate on dividends will become 20%.
  4. The capital gains tax rate will go from $0 back up to 10% for lower-income brackets and from 15% back up to 20% for higher-income taxpayers.
  5. Child tax credit falls back to $500/child from $1000.
  6. Estate tax rates will revert back to 2001 levels with  the possible exception that the estate tax limit will be applied to estates of $3 million or more.
Check out the interactive budget projection website at the CBO. Play with it awhile and see what happens to the deficit/debt projections if we do extend all the Bush tax cuts for another decade…the numbers in the red make your hair stand straight up on end.

Any extension of the Bush tax cuts past the end of 2010 will only make the deficit numbers much worse than they already are today.

(to be continued…)

Courtesy of www.district87.org

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