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Thread: separate thread on Alternative Minimum Tax ...

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    Default separate thread on Alternative Minimum Tax ...

    as it is very possible that many full time dancers or married dancers will be feeling the effects of the AMT, I thought that a separate discussion thread was in order. This is particularly the case since it is probable that this year's 'one shot' relief from automatically escalating AMT is not likely to be renewed for 2007, which makes 2007 tax planning extremely important for those who are likely to be 'bitten' by the AMT on this year's earnings when they file their 2007 tax return.


    There is a very good overview of the AMT at .

    In a nutshell, standard IRS income tax rates might call for say a 20% effective federal income tax rate for someone who grosses $75k per year. However, that person was able to reduce their effective federal income tax to a lower actual percentage by deducting home mortgage interest, state and local income tax payments, and a bunch of other deductions as described in the above link, such that their effective tax rate was only say 15%. However, the AMT laws require that Americans grossing more than the exemption amounts pay a minimum of 26% tax on incomes in excess of the exempt amounts. Thus AMT laws begin to disallow the tax deductions for home mortgage interest, state and local income tax payments etc. to make sure that the effective tax rate that the person actually winds up paying is maintained at the higher level.


    (snip)"Alternative minimum tax (AMT)

    AMT exemption amounts, which were expanded under various tax laws in 2001, 2003 and 2004, expired at the end of 2005. TIPRA increases AMT exemption amounts beyond their 2005 levels for the 2006 year only. New AMT exemption amounts for 2006 are:
    $62,550 for married individuals filing jointly
    $42,500 for single filers
    $31,275 for married individuals filing separately

    The Act also resurrects, at least for 2006, the rules that allow non-refundable personal tax credits (the dependent care credit, the credit for the elderly and disabled, the Hope credit for certain college expenses and the Lifetime Learning credit, for instance) to offset the AMT.

    In 2005, an estimated four million taxpayers were subject to the AMT, but a recent report from Congressional Research Services estimates AMT will affect 23 million Americans in 2007 without further tax law change. That’s because the AMT is not currently indexed for inflation, while the regular tax system is, and consequently every year more average-income households cross over into the AMT. Experts say the current relief is not substantial and it’s uncertain whether AMT will either be reformed or repealed because of the substantial tax revenue cost."(snip) from


    What the article is saying in a politically correct way (sorry don't mean to be political but this one translates into direct financial impact i.e. higher tax liabilities) is that the AMT relief measures passed by the last US congress were all temporary measures, such that unless the new US congress passes additional AMT tax relief legislation your 2007 earnings will be subject to the provisions of the original AMT law as those temporary AMT tax relief measures expire.


    (snip)"The alternative minimum tax (AMT) method does provide each taxpayer with a flat dollar amount that is completely exempt from tax. The dollar amount of your exemption depends on your filing status. The exemption amounts for 2006 are:

    * $62,550 if married filing jointly or as a surviving spouse
    * $42,500 if single or a head of household
    * $31,275 if married filing separately

    In 2006, the available AMT exemption amounts are reduced by 25 percent of the amount by which an individual's taxable income for AMT purposes (called AMTI) exceeds: $150,000 for joint filers and surviving spouses; $112,500 for single taxpayers; and $75,000 for a married couple filing seperate returns. The AMT exemption amounts are eliminated entirely if AMTI exceeds: $400,200 for joint filers; $282,500 for single individuals and heads of households; and $200,100 for married taxpayers filing separately.

    Although the exemption amounts have increased in recent years, the AMT rates remain the same for 2001 and beyond. If your AMTI exceeds the exemption amount, you will be subject to a 26 percent AMT rate on the first $175,000 of AMTI ($87,500 for married taxpayers filing separately) that exceeds the exemption amount, and a 28 percent rate on any AMTI above this $175,000 amount."(snip) from


    I would also add that if the new US congress does nothing in regard to AMT relief legislation, the 2007 AMT exempt earnings amounts will revert to the originally set levels of $45,000 for couples and $33,750 for singles. This potentially means that for people who have large deductibles for mortgage interest, high state and local tax rates etc. that every additional dollar they earn over the AMT exempt amounts may now be subject to a very stiff income tax rate. For example, in New York, a self-employed dancer's earnings above the $42,500 for 2006 / $33,750 for 2007 AMT exemption amounts could potentially be subject to a total effective tax rate of 26% federal + 15.3% Self Employment + 8% state/local = 49.3% i.e. one out of every two extra dollars earned going to taxes.

    ~
    Last edited by Melonie; 02-03-2007 at 10:17 AM.

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    Default Re: separate thread on Alternative Minimum Tax ...

    also, because of the AMT, you now have to be careful about which tax exempt municipal bonds you invest in .... because muni bonds involving 'private' activities must be counted towards AMT tax liability versus 'public' activities being exempt from AMT tax as well as regular income tax ...

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    Default Re: separate thread on Alternative Minimum Tax ...

    Gee, Mel - almost makes a person not want to work for a living!

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    Default Re: separate thread on Alternative Minimum Tax ...

    also, while the published 'starting' tax rate for the AMT is 26%, and the published 'ending' tax rate for the AMT is 28% for the phase-out of tax deductions, the real world effective tax rate for people whose incomes fall somewhere between the 'starting' figure of $112,500 single $150,000 married joint and the 'ending' figure of $282,500 single $400,200 married joint can be significantly higher than 26-28%

    (snip)"Affected taxpayers must calculate their Alternative Minimum Taxable Income (AMTI). Below certain levels of AMTI, they get the full exemption. In 2006, for single filers, the phase-out range was $112,500 to $282,500. For married couples, the phase-out range was higher, from $150,000 to $400,200. All these numbers likely will be different in 2007.

    However the numbers play out, the principles are the same. Below the phase-out range, AMT payers have a marginal tax rate of 26%; above the phase-out range, that rate is 28%. Within the phase-out range, though, the marginal tax rate is higher because the AMT exemption drops as AMTI rises. AMT payers effectively have a marginal tax rate of 32.5% or 35%, in the phase-out range.

    What's more, those four marginal tax rates--26%, 32.5%, 35%, 28%--are true marginal rates. There are no ancillary tax benefits that affect AMT marginal rates, as there are with the regular income tax."(snip) from


    so yes, for a self-employed single person who is breaking their ass to earn say $150k a year in a high tax state like say New York, after taking into account the effects of the AMT the effective tax rate on every additional dollar of income beyond $150k is 33% federal + 9% state/local + 4% medicare= 46% ! Again, even though this person has exceeded their Social Security tax maximum, they will STILL wind up paying nearly 50% of every additional dollar in taxes ! It isn't until that person can manage to earn more than $282k that their effective federal tax rate will drop back to 28%.


    Back to your observation that the AMT almost makes a person not to want to work for a living, in high tax states like New York that is no joke. Consider a married couple where one is say a 'professional' with a $150k income. If the other is considering the choice of working or not working, the fact that just about 50 cents of every dollar the second person earns will go to taxes, i.e. the second person will only be able to keep 50% of their earnings, does create such a quandry. If for example the ability of the second person to work also brings additional expenses into play i.e. a second vehicle / car payment / car insurance, or baby-sitting expenses, or frequent restaurant / take-out meals, it's distinctly possible that the second person's net earnings from working versus the additional out-of-pocket costs which go along with the second person working may result in the second person 'working for nothing'.

    ~
    Last edited by Melonie; 02-03-2007 at 05:57 PM.

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