During the election, pollsters consistently showed that for the majority of voters “the economy” was a primary concern. Unfortunately, nobody asks the test contingent what exactly they mean when they blacken a little circle next to “The Economy” and why they believe in new elects having any impact on it.
In reality, for most people, the economic worries amount to “I don’t have enough money to survive and I hope the President will make sure that I do.” I can hear the audience laughing. I’m laughing too – through tears.
“Economy” is a very broad term. It includes creation of the new jobs (the best hope for it are the small businesses, which don’t get government subsidies and bailouts); reduction of the national debt (it would result in less of the tax money going into paying interest to the foreign lenders, but the counter keeps ticking upward); the trade deficit (well, that’s an ongoing joke); domestic treasury (the interest rates have been at the record lows for years now, nevertheless the equity and debt markets jump up and down like a rabbit and a frog); foreign monetary policy (the only time the dollar gets stronger is because other currencies tumble), etc. Oh, politicians of all ranks talk a lot about these issues, but they are like birds: a lot of chirping and wing-flapping, but there is no way they can do anything useful with those feathered extremities.
I’d say that the only part of “the economy,” on which the government has a direct, visible, and tangible impact is TAXATION. Three months ago I offered my opinion on the pre-election debates around the tax cuts and ridiculous $250K “middle-class” ceiling. Well, at least those topics were brought into public view, brightly spot-lighted by all respectable publications, both in print and on the web.
But there are IRS changes that quietly undercut the fiscal well-being of millions of middle-class taxpayers, while remaining largely misunderstood and unnoticed. From time to time they are briefly mentioned in the secondary business media, such as the WSJ blog, or discussed on specific accounting and taxation sites, but I believe everybody should be urgently educated on these financial assault weapons. We should be screaming about them.
Among these painful tax issues, the Alternative Minimum Tax (AMT) is a biggie. The general public is very intimidated by the AMT concept because the tax preparers are not willing to divulge their “trade secrets.” But the majority of financial professionals who don’t make their living in personal taxation, including me, have no problem clarifying that it’s exactly what it sounds like: the other method of calculating your tax liability, different from the conventional method. Both methods must be applied and the one resulting in the higher taxes must be elected.
The AMT approach seemingly follows the familiar chain of Gross Income, less adjustments, less exemptions, less deductions, less credits. However, the structure of the reductions used to arrive at the taxable income and the way the flat AMT rate is applied make a big difference.
First of all, AMT disallows a large portion of the itemized deductions, including 100% of state and local taxes, plus a big chunk of medical expenses as well as of mortgage interest. Moreover, while maxed at a seemingly lower flat rate (28%) than the top tax bracket (35%), AMT frequently yields higher results, because it’s applied evenly to every dollar, starting with the very first one. To contrast: regular method uses a progressive scale, wherein the first dollar is taxed at 10%,$8,701-st (for singles) at 15%, etc.; the 28% rate kicks in only after you reach $85,650 and 35% is applied to incomes over $388,850.
Still, for many years this alternate methodology was kept at bay by the legislature, impacting only the big earners (2.7% of US taxpayers, or 3.8 million households). The instrument of taming the AMT was the level of exemptions (non-taxable income). In 2011 they were: $74,450 for married taxpayers filing jointly, $48,450 for singles and the heads of households, $37,225 for married couples filing separately.
But everything changes now. 33 million will end up paying significantly more money to the federal government, because (unless a sensible decision is passed before the end of the year) the exemptions will drop to, respectively, $45,000, $33,750, and $22,500, bringing the AMT to new heights.
As I said, this is a big one and it’s shocking that people are not talking about it every day at the water fountains. However, there are even quieter changes in the Internal Revenue Code that lick the butter away from your bread. For example, I have not seen any articles in newspapers or magazines addressing the fact that all of a sudden over-the-counter (OTC) medications were disallowed from the medical portion of itemized deductions. And the $2,400 cap on pre-tax contributions into medical flexible spending accounts (FSA) went absolutely unspoken. It just happened.
I estimate that between changes in OTC, FSA, and AMT, my tax bill for 2012 will be $10,000 higher than it would be without these alternations. I cannot help myself feeling violated. Don’t you?
The Frustrated CFO 