A Kate and Joe were in yesterday. They are professionals raising four kids, who, between the two of them, make around $350,000 a year. They were bemoaning the fact that, according to the media, their taxes are going to go up.
When we actually looked at their numbers, I had a different prediction: their taxes won’t go up. How could this be? Please excuse me while I get a bit tax-geeky (and simultaneously simplify the tax code and the political system for explanatory purposes.)
$15,000 of the $120,000 Kate and Joe pay in federal taxes is the dreaded “Alternative Minimum Tax” or AMT. While Alternative Minimum Tax sounds appealing, it basically limits the deductions of people who make between $200,000 and $600,000 a year. It usually kicks in if you pay a lot in property tax or state income tax and earn $200-600K. Most people who are paying it don’t know they’re paying it and don’t care about the distinction between regular tax and AMT. It’s all the IRS to them.
However, if regular tax rates rise, before Kate and Joe would actually have to pay more, their AMT would have to go down to
zero. For instance, if the top bracket goes from 35% to 39.6% on people making over $250K, Kate and Joe’s taxes would
theoretically increase 4.6% * 100,000 = $4600. Because they pay $15,000 in AMT, this “tax increase” would mean they’d pay
$4600 less in AMT and $4600 more in regular tax. The net effect of the “tax increase” would be zero.
Using my example, the tax increases that the experts are predicting will have the biggest impact on folks making over
$600,000. But Kate and Joe, and a lot of people like them, shouldn’t worry about tax increases.
That being said, I might turn out to be wrong. Have you heard the pundits peddling fear of tax increases admit that?
Photo by: Robby Green