If you're like most taxpayers, you work hard to manage your tax burden. You look for deductions and credits wherever you can find them, while also minimizing your taxable income and using tax-favored accounts like IRAs and 401(k) plans. Even though tax rules are complicated, understanding them and doing your own tax planning are reachable goals. Yet a completely different set of rules known as the alternative minimum tax can wipe out your carefully conceived plans. The AMT has gone far beyond its original purpose, and it's time to make it go away.
The alternative minimum tax was originally intended simply to make sure that ultra-rich taxpayers didn't use tax shelters and other tactics to avoid having to pay taxes at all. Now, however, the AMT has reached out and grabbed millions of regular people with moderate income levels. Because planning for the AMT requires completely different strategies from regular tax planning, it's extremely difficult to find solutions that will reduce both standard tax and AMT liability.
The problem lies in the way the AMT is calculated. Regular income tax rules include many favorable provisions, including deductions for dependents, state and local taxes, and medical expenses, as well as miscellaneous itemized deductions and provisions for certain types of stock options. So you might as well structure your taxes to take advantage of these provisions. With the AMT, however, most of these advantages completely disappear, with the result that you've wasted your time trying to plan to minimize your tax liability.
Make taxes simple
AMT supporters say that eliminating the AMT would only reduce tax revenues further, exacerbating the budget deficit and threatening the country's fiscal condition. Nearly everyone agrees, however, that what really needs to happen is for tax laws to get simpler. While complicated rules keep expensive tax professionals in business, they impose a huge burden on taxpayers.
It's true that tax simplification would hurt some industries. Big insurance companies like AIG (NYSE: AIG ) would lobby strongly against removing the tax breaks on insurance policies. Home builders like D.R. Horton (NYSE: DHI ) and mortgage lenders like New Century (NYSE: NEW ) rely on the home mortgage interest deduction to drive business. Yet substantial revisions of the tax laws in 1986 eliminated many deductions without destroying the economy, and there's no reason why it would be different this time.
The first step toward making taxes simple is eliminating the AMT. While it may have served a limited purpose in the past, it's quickly becoming a huge obstacle in the tax planning of mainstream American taxpayers.
The Motley Fool's Tax Center has all kinds of information to help you keep more of your hard-earned money away from the IRS. For more general advice about your financial planning, take advantage of the Fool's 30-day free trial to take a closer look at Motley Fool Green Light. There's no obligation, and you'll find useful information that will help you not just with taxes but with every element of your financial life.
Fool contributor Dan Caplinger won't have to pay the AMT this year, but he'd just as soon not have to worry about it in the future. He doesn't own shares of any of the companies mentioned in this article. The Fool's disclosure policy is never taxing.