I’ve often heard that if you’re going to owe the Alternative Minimum Tax, there’s nothing you can do about it. And that makes me scream! Most of these officious statements say you can postpone some income and defer the AMT, but you’ll just pay them next year. “There’s nothing you can do to avoid the AMT.” It’s a lie!
I was absent-mindedly reading some of the boilerplate on some of my other investments. “You might like to buy some AMT-free bonds,” Dreyfus said. I instantly perked up my ears and investigated. I’ve looked up some Dreyfus funds, and I am also checking into Citicorp, “Black Rock,” and Fidelity.
It’s true that these bonds may pay a lower rate than conventional bonds, but that is not a big deal. It’s also apparently true that there aren’t any (at this time) AMT-free bond funds that are California-only, and thus entirely free of federal and state taxes and the AMT. But I don’t mind paying some taxes, so long as I can start to get out of paying so much AMT.
ACCORDING TO MY GUY...
My friend in the stockbroker business says he can avoid the AMT as well as state and federal taxes by buying a specific bond issued in California. (Whatever state you live in, do your homework.) To do this, you may have to make a $5000 minimum initial investment. I mean, I don’t mind paying my fair share of taxes, but the AMT rates are absurd, with hardly any fair deductions or exemptions permitted.
For example, after I pay my state taxes, my ordinary 1040 federal gross taxable income (line 38) would be improved by deducting those state taxes. But the AMT forces me to pay federal (AMT) taxes on my state taxes. That’s not fair.
The 6251 form indicates that you just pay a 28% tax rate, but that’s another lie. After you put in the surtax multipliers, the incremental tax rate can go above 44%, and the base exemption is only about $66,000 for a joint return. You can get shafted real fast by the AMT—not to mention that you can get ruined by other obscure, hidden, unfair tax rates as high as 85% per the Social Security benefits worksheet.
Specifically, you don’t just add and “combine” the data on lines 1-27 on line 28 of form 6251. If your income is above 207.5k, you take the total that should go on line 28, multiply the excess over 207.5k by 25%, and put that into line 28, so every $1000 increase in your income can cause a $1250 increase in taxable income on line 28. (This would normally require another worksheet, but the AMT guys want things to look simple.)
Further, as your income increases, your exemptions (on the page 7 worksheet) decrease, so your taxable income goes up again by another $312.50. Then, down at the deductions worksheet, this $1000 increase, too, is multiplied up by –(–3%), so you are paying a “28%” tax on $1592. It results in a $446 increase in your taxes, for a 44.6% tax rate—and that is before you start paying state income taxes. (Does your state have an AMT state tax, too? Lucky you!)
WHAT TO DO?
If you do a Web search for AMT-free bonds, you can start learning. Ask for a prospectus. Obviously, I can not recommend any particular fund. But I have invested some of my long-term retirement funds in these AMT-free bond funds. Note that books and magazine articles keep saying that you can’t avoid the AMT, and I am absolutely fed up with their lies!
If you got advice on how to avoid AMT on your investments, you read it here, not there. I bought a couple of big $30 tax books published by Lasser and by Ernst & Young. They claim “We’ll tell you things the IRS doesn’t want you to know.” But they don’t tell you one word about AMT-free bond funds. Ahem. I puke in their lousy, lying briefcases.
If you are at all skeptical, just add an extra $1000 to your income, run that through your computerized tax program (or your tax expert), and see how your tax changes. Plug another $1000 into your capital gains, and see how that changes things—especially in your AMT. Surprise! Have you seen your 2007 tax forms yet? As I write this, I have not seen mine.
Maybe you can print yours at www.irs.gov. But the mailman will just barely bring yours, in the nick of time, because Congress was so slow to settle this AMT matter in December, and its members aren’t happy about being forced to make decisions on tax law that will make so many people unhappy.
You don’t have to be rich to get shafted by the AMT. Just sell a little stock, or receive some capital gains. I haven’t done all the math, but a lot of taxpayers will be very unhappy when they learn that they have to pay thousands of dollars of extra taxes. And they, too, will be furious about being lied to.
The AMT is not going to be reformed or indexed properly anytime soon, because doing so would cause the loss of many hundreds of billions of dollars of revenue. And nobody can figure out how to plan any reforms, as they can’t imagine how to replace all that revenue.
Comments invited! [email protected] —or:
Mail Stop D2597A, National Semiconductor
P.O. Box 58090, Santa Clara, CA 95052-8090