Q. I’m in Alternative Minimum Tax each year. Do you think Trump’s new tax brackets could help me?
— Tax weary
A. The short answer is yes. President Trump’s tax plan and the plan being offered by Republicans in the House of Representative both call for a repeal of the Alternative Minimum Tax, or AMT.
There will be other important tax changes, too, but let’s start with AMT.
Dean Shah, a certified financial planner with Stonegate Wealth Management in Oakland, said he believes the AMT should be repealed.
“Its original purpose was to ‘catch’ some wealthy people who in 1969 under the Nixon administration did not pay tax — legally — by using the exemptions and deductions that existed under the tax code,” Shah said.
This created a typical political firestorm, so Congress created the AMT to create a parallel tax system to make everyone pay tax regardless of many of the exemptions that existed, Shah said.
But unfortunately, this tax started to affect more and more of the middle class through the 1970s in times of high inflation, he said.
In those days, brackets and exemption amounts were not adjusted for inflation.
“When Reagan cut taxes in the early 1980s and also revamped the tax code in 1986, the AMT remained like a speed trap ready to capture middle class people who come from states like New Jersey,” Shah said.
Basically, he said, the AMT makes you add back two deductions that are high for most residents of high tax states like New Jersey — state income taxes and property taxes — before the AMT is calculated.
“Because of this, residents of this state did not entirely benefit under Reagan’s tax cuts or the 1986 tax law,” he said. “Additionally the exemption amount used to calculate the AMT was not adjusted for inflation, causing more and more people to be caught up paying tax on some of their itemized deductions.”
Congress would pass occasional fixes, Shah said, but they did not finally index the exemption amount to inflation until recently.
Many middle class people are trapped in this system.
Shah said tax code like the AMT are truly sneaky ways for Congress to capture more of your income without having to raise taxes.
“For that reason we’d like to see it eliminated completely,” Shah said. “We’ve always been surprised that New Jersey’s congressmen and senators have not made the AMT more of an issue considering how negatively it has affected the state’s residents.”
Now let’s get to the nitty-gritty of the expected tax changes. Take a look at this chart:
As you can see, the Trump tax plan and House GOP tax plan would reduce the number of tax rates from seven to three: 12, 25 and 33 percent. That’s well below today’s top rates of 36 and 39.6 percent, Shah said.
He said the Trump tax plan calls for a standard deduction of $30,000 for couples while the House GOP plan calls for $24,000 for couples, up from $12,600 today, Shah said.
“The House plan would eliminate all itemized deductions except those for mortgage interest and charitable contributions,” Shah said. “Trump’s plan, by contrast, keeps itemized deductions, but caps their total value at $100,000 for singles or $200,000 for joint filers.”
“These are proposals,” he added. “What gets approved remains to be seen.”
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