What is Form 6251: Alternative Minimum Tax

Form 6251 AMTForm 6251: Alternative Minimum Tax (Individuals) is the form taxpayers must fill out to determine whether or not they are subject to the dreaded Alternative Minimum Tax (AMT). The AMT is another way of calculating your tax liability and those subject to its wrath will see their tax liability increase, as certain deductions are disallowed under AMT.

As scary as the AMT itself is, the form is only two pages with 54 “questions.”

Simple, right?

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Bush Tax Cut Extension Appears Likely

Update 12/9: House Democrats rejected the deal, so we’ll have to see what happens from here.

Update 12/6: A deal has been made – Bush tax cuts will be extended for two years for all income levels and unemployment benefits will be extended.

It appears that a compromise on the Bush tax cuts is likely and that compromise will take the form of an extension. CNN Money quoted Senator Orrin Hatch (UT-R) as saying that neither “side” has enough votes to pass the plan they want so they’ll probably extend the cuts another two years and deal with it then. Senator Ron Wyden (OR-D) is also referenced as calling for a one year extension of the tax cuts to give Congress more time to put together a deal.

What does this mean for the tax brackets? The brackets would stay the same and the ranges would increase to track alongside inflation, as reported by the BLS. Capital gains rates would also stay the same at 0% and 15%, depending on your marginal income tax rate.

Sadly, this seems to be the modus operandi of Congress on issues like this – just take a look at AMT and how often “relief” has been extended as a stop gap measure in the waning minutes of the year.

 Personal Finance, Retirement 

McCain on Alternative Minimum Tax

Ahhh the lovely Alternative Minimum Tax. For years the government has been putting patches on the AMT so that it ensnares fewer and fewer people, though without the corresponding adjustment in spending, and we once again dance the same dance now that we have set candidates to the two major political parties. Where do each stand on the AMT?

McCain, during the primaries, proposed doing away with the AMT altogether but recently changed his stance from repeal to phase out. Under the phase-out, more than 4 million households would continue to pay the AMT. To be honest, I doubt McCain really meant “appeal” when he was spoke about it because the thing generates so much revenue, $2 trillion over ten years. He likely meant exactly what he’s saying now, “appeal” it for the middle class but keep it for the wealthy.

I sympathize with the wealthy who feel unfairly taxed for the same services, but the money has to come from somewhere and we all have to buy the same things. While it sucks for someone to have half their next dollar taken away from the government, it hurts that person less than it does someone who has far less earning power (that doesn’t make it right, it just makes it more manageable). Plus, rich people don’t riot. 🙂

I do think that the government has to reign in its spending (I used to work in defense, I’m aware of some of its excesses) but unfortunately it’s Presidential politics season and it’s far easier to tax a smaller group than reduce benefits for a larger group.

McCain will repeal the AMT. Wait, no … [CNN Money]


Dumb Year End Money Moves: Marriage, AMT, Bonuses & More

The blogosphere is chock full of things you should do at the end of the year, like making donations and saving kittens, but what about those things you shouldn’t be doing? I’ve put my brain on the subject and while I’m not a tax expert, I believe the following list is a good start of things to avoid doing near the end of the year if you want to save yourself a few tax dollars.

1. Don’t Get Married:

The marriage penalty pretty much sucks (but marriage is awesome!) and your filing status for the year is based on your filing status when the year ends, December 31st. It doesn’t matter if you get married 11:59pm on December 31st or 12:01am on January 1st, your filing status is married no matter what. Is the marriage penalty really that bad? Two singles making $70k a year will pay a total of $13,923.75 each in taxes, or $27,847.5 combined. A married couple making $140k a year combined will pay $28,192.50 – $345 more. I don’t know about you but I’d rather put that $345 into my pocket than Uncle Sam’s.

2. Prepaying Taxes & Other Unallowable Deductions under AMT

The Alternative Minimum Tax is an ugly word lots of people have been throwing around lately and it has the potential of taking a positive tax move and turning it into a hugely negative one. Prepaying certain deductible expenses, such as state/local/property taxes, early allows you to take the deduction earlier – that’s a positive tax move. However, if you are subject to the AMT, you aren’t allowed to take those deductions so you face the double whammy of prepaying your taxes (you lose interest on the money in a bank account) plus you get no benefit for doing so (tax deduction).

First determine if you’re subject to AMT (there is no 2007 calculator, I would just use the 2006). If you are, don’t prepay these normally deductible expenses (state and local income taxes and property taxes, un-reimbursed business expenses, child-tax credits, tax-preparation fees, legal fees, home-equity loan interest). If you are, then try to prepay them if you can so they can be applied to your 2007 tax bill, instead of your 2008 tax bill.

3. Don’t Sell Stock – Lower Capital Gains Rates in 2008

If you’re in the 10% or 15% income tax bracket, next year that your long term capital gains tax will fall to 0%, so wait a few more weeks if you’ve been thinking of pulling the plug on an investment.

4. Defer Compensation If You Can

The following moves all fall under the greater heading of deferring compensation because money you earn in December 2007 is taxed on April 2008. Money earned in January 2008 is taxed in April 2009 – a significant difference for such a short delay.

  • 4a. Don’t Take That Bonus (Yet): Bonuses are hot but try to push the payment of that year end bonus to the new year and you can push the tax bill to next year also.
  • 4b. Don’t Take A Capital Gain (Yet): Much like a bonus, don’t take a capital gain near the end of the year when you can push it to next year. The reasoning is the same – you get your cash in a few weeks and you get the tax bill in over twelve months. If you have a loss this year, you can even use that to reduce your income. (plus, you might be seeing lower tax rates)

This is part of a Money Blog Network group project in which we discuss some great year end money moves, I went against the grain with this one. If you can think of any moves one should avoid at the end of the year or have any thoughts on any of these, please do share them and I’ll add it to the post.


My Thoughts on “The Mother of All Tax Reforms”

Representative Charles Rangel (D-NY), Chairman of the House’s Ways and Means Committee, unveiled a huge $1 trillion tax cut bill. It’s a bill designed to get everyone talking about it, rather than skirting the issues, though anyone thinking the House will pass it is likely misguided. I read CNN’s overview of it and wanted to share some of my thoughts with you all (and hope you do the same with all of us).

Decrease: Action! Action! AMT Repealed!

The bill would repeal the alternative minimum tax, rather than patch it for another year, and this is the marquee headline of the bill. I personally think a full repeal is foolish, why not adjust it and then index the dollar amounts with inflation? The idea was to stop the wealthy from taking unfair tax breaks, which is something I think should still happen, so why repeal it entirely when you can help the middle class while still keeping with the spirit of AMT?

Ultimately the goal of the bill seems to be to get discussion going on the AMT, so what better way than to just axe it? Most experts believe that another one-year patch will be put on the AMT to help the estimate 800 billion people likely to be affected by it (yes, 800 billion is a totally made up figure, but that number doesn’t actually matter unless you’re one of them!). It’s like putting a band-aid on an infected cut; it’s nice that you’re doing something, but let’s fix it instead of putting it off.

Decrease: Higher Standard Deduction

An increase in the standard deduction of $850 for joint filers and $425 for single filers, which, in theory, actually helps the affluent more than it helps the middle and lower classes. In theory, if you are in a higher tax bracket, you’re taxed at a higher rate. Thus, by increasing the standard deduction, you actually decrease the tax on a higher income earning person. Now, in practice this idea will help the lower income folks because they are more likely to take the standard deduction. As the standard deduction increases, the idea that buying a home is better, for the tax benefits, will become less and less clear.

Decrease: Easier Child Tax Credits

Without getting into the muck of this particular proposal, I think anything that allows more tax credits for families with children is a good thing. With the rising cost of college, two income families, and other children related items, I think we need to be fostering an environment in which children of all economic classes are able to flourish. Now, this puts the onus on the parents to actually spend that money on the children, which may or may not happen.

Increase: 4% Surcharge, $200k+ incomes

And the warm fuzzies end as we get into the part where the reform talks about paying for the first three tax decreases… The idea with this particular piece is that married with $200k+ in AGI and singles with $150k+ in AGI would have a 4% surcharge on the sum above that limit added onto their taxes. For those over half a million, it’s a 4.6% surcharge. This, in combination with a repeal of the AMT, would theoretically result in lower taxes for those making less than half a million.

Everything Else

That ends the provisions that most directly affects most of us, the rest include additional taxes on fund managers and businesses that will impact us indirectly. Anytime you tax businesses, it has the potential to stifle growth (duh! less money on investment) but I think that’s in part fueled by how people, businesses included, don’t like to be taxed more. However, if you look at the tax cuts, they’re really just closing loopholes like accounting magic (valuation of inventories would be affected), corporate tax break loopholes, and empower the IRS to penalize companies dabbling in chicanery. In fact, the bill actually proposes to reduce the top corporate tax rate from 35% to 30.5%.


Other than the AMT, this bill doesn’t really do much for me from the perspective of real change. So you tweak a few things here, tweak a few things there, why not just clean up the whole million page IRS code and make things easier on everyone? I think every time I see one of these “mother of all tax reform” announcements, I think about how simple life would be if we had a flat ax or consumption based tax. 🙂

What are you thoughts? Fire away!


Start Thinking About Filing Your 2006 Taxes

Thanksgiving is over (even though the leftovers are still packed into the fridge), the Happy Holidays are just around the corner, now is the time to make those end of the year tax decisions before you get overcome with all the craziness of the holidays. So, I dove into the archives and saw that last year I wrote a whole bunch of posts related to year-end tax moves that still apply (most of them) to this year, so I thought I’d link to them so I’d know where they were:

And, if you don’t like taxes, read this argument about how the tax system will collapse in ten years.


Official Tax Reform Panel Recommendations

Today, as planned, the Presidential Tax Reform Panel offered two final proposals that would simplify our currently bloated tax code yet still collect the same amount of tax revenue. I discussed it a few weeks ago when details of the proposals were leaked and many of the details turned out to be true. Elimination of the AMT and modifications to how mortgage interest can be deducted are the two hot button issues but elimination of the marriage penalty and alteration of investment taxation rules are pretty sizzling as well.

Eliminate AMT:
The Alternative Minimum Tax (AMT) essentially removes some tax deductions from the rich to ensure they pay their fair share, except what defines the rich isn’t inflation adjusted so now lots of people who aren’t considered rich are facing these taxes. (more on AMT)

Change Homeowners Mortgage Tax Break:
I discussed it a few weeks ago but reserved judgment until the hard numbers came out and it doesn’t look very promising. The deduction is replaced with a credit at 15% of interest and the range of home values eligible for that credit is between $227k – $410k. This bodes well for folks in the 15% tax bracket or less (with eligible homes) but not well for everyone else.

Eliminate Marriage Penalty:
This one never made sense in the first place (especially in an egalitarian society of gender equality!) but they just suggested to double everything for married couples compared to singles.

Reducing Investment Taxes:
This one gets a little confused. Proposal 1 only taxes 25% of your investment gains but at your marginal tax rate, which basically means you’ll be taxed between 3.75% and 8.25% on the whole thing. The second proposal says a tax of 15% across all investments.

Retirement and Savings Plan Changes:
All your retirement and savings plans will roll into one of three plans. All work related ones (401k’s, 403b’s, etc.) are Save at Work Accounts. All IRAs are Save for Retirement Accounts. All educational and health related accounts would fall into Save for Family Accounts. At least it simplifies things and might make a few more people save a little more.

Those five are the major items but there are a few others such as simplifying the filing of taxes (creating a 1040 Simple form that fits on a two-sided 4×6 index card), reducing the number of tax brackets, taxing employer health contributions, and some other deduction repeals. Those five items are the major headliners though.

If you’re interested in some light reading, check out the official report.

 Government, Personal Finance, Taxes 

Presidential Tax Reform Panel Recommendations

CNN/Money reported today that the Presidential Tax Reform Panel has recommended two plans of reform for our complicated federal tax code (they met for the second and last time yesterday). The first is to simplify and modify the current federal tax code while the second adds a “progressive” consumption tax; both include the elimination of the much hated and now miss-targeting Alternative Minimum Tax. A few of the suggestions make great sense while others don’t but for the most part I think they’re worth discussing.

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