Alpha in the News
For advisers, maximum rage over alternative minimum taxMarch 23, 2012
by Mark Schoeff Jr.
AMT makes tax planning a royal pain; this year is no exception, despite bill that would kill the levy
With April 15 looming, most people have taxes on their mind. There's one levy in particular that sets off investment advisers the alternative minimum tax.
Frustration with this part of the code became evident when advisers reacted this week to the budget resolution that the House likely will approve next week.
Although it has almost no chance of becoming law because of opposition from Senate Democrats, the proposal introduced by Rep. Paul Ryan, R-Wisc., House Budget Committee chairman, contains dramatic tax reform. It would streamline the current six tax brackets to two -- 10% and 25% -- and reduce the corporate rate to 25%.
It would also eliminate -- yes, eliminate -- the AMT.
Drafted by Republican on the House Ways & Means Committee, the plan is meant to sharpen the tax-reform debate in this fall's elections. Although it's a long way from becoming law, advisers are already dreaming about scuttling the AMT.
"The alternative minimum tax is one of the worst implemented taxes in history," John Gugle, principal at Alpha Financial Advisors, wrote in an e-mail. "It was established for all the right reasons, but now it is affecting middle-to upper-income earners who end up losing their valid deductions."
The tax was instituted in the 1970s as a way to ensure that the wealthy would always have to pay up. But it was not indexed for inflation. Each year, the number of people who could be subject to the AMT expands until Congress passes a so-called "patch" that fixes the problem.
The patch, however, is one of the tax extenders that Congress addresses in a haphazard fashion. There's no particular schedule for the extenders, and they often have to be implemented retroactively, making tax planning an exercise in futility.
"There is just the assumption out there that the AMT patch will continue to be extended," Jody Team, chief executive of Team Financial Strategies, wrote in an email. "Our tax software does not include the patch because it has not been passed for this year. It is one example of where it is difficult to plan for clients. Do we always assume it is going to be patched and take the risk of it not being patched and the client not paying in enough? Or do we assume it will not be patched and assume higher taxes for everyone making $70,000 or more on joint returns? These are the kinds of things that breed uncertainty in this environment."
The tax limbo will continue until after the election, when a lame-duck Congress will decide whether to extend the Bush-administration tax cuts that expire on Dec. 31.
Until then, David John Marotta, president of Marotta Wealth Management, is recommending that his clients take capital gains and do Roth conversions with their Individual Retirement Accounts while tax rates are low this year. The goal is to make accounts "as tax efficient as possible."
Nearly half of Mr. Marotta's clients run small business through their own tax returns. These are the people who advocates say will be hurt if the Bush tax cuts end and the top rates increase -- an outcome Mr. Marotta fears.
"All we have is the vague sense that taxes will be higher on small business owners in the future," Mr. Marotta said.
March 23, 2012