Money Mondays: Alternative Minimum Tax and Family Finances

by Rocket Finance

Every Monday, I spend a little time commenting on articles found in the most recent issue of Money magazine. I read the periodical cover to cover every month.

Congressman Charlie Rangel was interviewed about his ideas for addressing the problem of the AMT or alternative minimum tax. Read FCN’s explanation of the AMT here. In a nutshell, Rangel wants to get rid of the AMT by means of a 4 to 5% tax hike on people making over 200K. This plan is a foolhardy. Here is why: most people making over 200K a year are small business owners – translation: employers. Tax liability for someone making $1 million a year would go up $50,000 – or the cost of one or two (tax paying) employees. For someone making $200K, the increased liability is $8K to $10K – or a third of a full-time employee or a couple of minimum wage high school kids. What do you think would happen to our economy if every person making over $200,000 a year had to fire one employee?

On the other hand, what might occur if Congress just removed the AMT altogether? Maybe more people get hired? Maybe investment increases? Maybe people buy more boats or cars or houses? Or maybe some people will feel guilty and still send a check to the government. It could happen. . . I am nowhere near having to pay the AMT tax, however it still affects my pocketbook. My part-time employer would like to hire me as a full-time employee, He makes between $250,000 and $300,000 a year. If his tax liability under the AMT were lifted, he would make another $15,000 a year (actually he might make more, because the products he manufactures are mostly purchased by people who also pay the AMT). $15,000, when added to my current pay, is easily enough to hire me full-time and give me a raise from my current full-time job.

The February issue of Money also devotes an article to helping parents move their adult children out of the house. It seems crazy to me that anyone needs help in this area. If you have freeloader children, jack up the rent, put their stuff on the curb or quit cooking good meals. Works every time. Obviously, if they have legitimate needs – like their house burned down or they are a paraplegic – don’t have them evicted, but come on, people, use some common sense!

There is also an interesting article about will bequests and offspring. One in five sets of parents favor one child over the other in the will and one in ten completely disinherits at least one child.

I think I am going to be treating my parents a little better over the next few years. . .

Money Magazine is a great resource for yourself or makes a great gift for a loved one.

  1. 3 Responses to “Money Mondays: Alternative Minimum Tax and Family Finances”

  2. By plonkee on Jan 28, 2008 | Reply

    Your tax system is so much more complicated than ours, it’s almost impossible to tell what the effects would be.

    Moving adult children out of your house is (apparently) difficult because you basically aren’t really treating them like adults. Two of my siblings lived at home for several temporary years after graduating. Didn’t bother my dad, but probably wasn’t that good for them.

  3. By rocketc on Jan 28, 2008 | Reply

    Part of the problem with our tax system intricacy. There was an article about how 40 accountants were given the same information for a family of four. All 40 came out with a different result.Our tax code is social engineering, our government tries to control or affect behavior through the tax code

    In our home, it was understood that the children would move out after college. I actually moved out after my sophomore year. In our country it is becoming more and more common for adult children to stay home after college – although there is still a cultural antipathy toward it.

  4. By Ray on Feb 5, 2008 | Reply

    I believe you’ve misunderstood the Rangel bill-
    the only way taxes increase on the average person is if they make in excess of $200K now or are shielding income by hedge fund loopholes.


    “Rangel’s plan earmarks enough money to roll back any AMT “surge” in 2007 — and raises that money by plugging the “carried interest” loophole that lets private equity and hedge fund managers annually avoid billions of dollars in taxes.

    Under Rangel’s proposal, hedge fund kingpins would also have to start paying taxes on income they stash into offshore accounts.

    The second piece of the Rangel plan– a piece that he won’t move for a vote until next year — would abolish the AMT outright. To offset the lost AMT revenue, Rangel is proposing a “surcharge” on high incomes, an additional 4 percent tax on incomes over $200,000 and an extra 4.6 percent on incomes over $500,000.

    These surcharges would hike the top tax rate that affluent taxpayers pay on ordinary income to 39.6 percent and the top rate on dividends and long-term capital gains — the income from the sale of stocks and bonds, for instance — from 15 to 19.6 percent.

    Families at the middle and lower end of the income ladder, in the meantime, would see their taxes fall under the Rangel plan, largely through an increase in the standard deduction.

    The third piece of Rangel’s plan addresses corporate taxes. Rangel wants to slice the top corporate tax rate from 35 to 30.5 percent — and end the loopholes that, under current law, have lowered the actual average tax rate on corporate profits to the mid 20 percent range.

    Will all these changes, taken together, leave the United States less unequal? To a limited extent, yes. Rangel’s changes would essentially offset most of the tax breaks for the rich that the Bush administration plopped into the tax code in 2001 and 2003.

    But a straight undoing of these rich people-friendly tax cuts, a Brookings Institution report noted earlier this year, only negates about one sixth of the rise in U.S. inequality since 1979.

    Rangel’s plan, in sum, amounts to a modest first step down the road to a more equitable United States. That could be good — because all great journeys start with single steps. But that could be bad as well, if lawmakers — and Presidential candidates — end up treating Rangel’s plan as the most, not the least, that could reasonably be achieved.

    Your statement that “…For someone making $200K, the increased liability is $8K to $10K” is massively incorrect.
    The correct info is that person’s taxes would be unchanged. To the extent that the individual makes in excess of $200K, that person’s marginal tax rate would increase by 4% for the first $300K, 4.6% for the income above $500K. For each $100,000 of income over $200,000 one would pay $4,000 additional in federal income taxes. In the case of your P/T boss his taxes might go up $4,000 ($300K-$200K =$100K x 4% =$4K), not $15,000. The $1M income person’s takes would increase by $31K, not $50K as you stated in your blog.

    It is also instructive to note that these are approximately the same fed income tax rates as under the Clinton Administration, where the usual subjects predicted recession or even worse if these rates were approved. As you recall we had a fairly robust economy. The Wall Street weenies were wrong then and they are probably wrong now.

    You might want to read up further on this or take some remedial algebra rather than repeating the usual right wing clap-trap. Also, I suggest we be kind to our kids; they’ll be paying back our deficit to the Chinese when they grow up and may be tempted to look at us geezers as expendible as our health care needs become too expensive!

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