Alternative Minimum Tax and FBs

[doubledogdare]

The mortgage reset trend has been well documented and discussed, but I’m curious whether any fellow readers have come across data or anecdotes about how Alternative Minimum Tax might be an additional hit to all of the FBs out there, especially in California.

From my understanding, a taxpayer under AMT will lose their ability to deduct state and local taxes (income and property) as well as interest on HELOCs. The items that put a person at risk for AMT include: (1) lots of itemized deductions, (2) high local and state taxes, and (3) a big mortgage expense. All of these seem to hold true for California residents, especially the ones who bought a home in the last few years with a toxic loan.

So, what’s the likelihood that the tax benefits of home ownership espoused by realtors could actually shove a person into AMT wherein they would be in worse shape on taxes come April 15th…not to mention the massive mortgage nut that has to be handled every month?

[poorgradstudent]

People who make enough money to be affected by AMT probably aren’t going to be the one’s sqeezed by massive mortgages. I’m sure there are some people who make $200,000 a year and still buy way too much home, but I don’t imagine there is a huge overlap between those under AMT and people who think 0% down, ARM loans are a good idea.

[PD]

I know a few people who have really stretched into their 2+M loan and are having a hard time making payments. I am sure they get hit by AMT. People at all levels are just hanging on.

For a couple, what is the threshold for AMT?

[doubledogdare]

From what I hear, the impact of AMT is growing to the point where people in the $100K income range will be the primary people hit by the tax (i.e., upper middle income segment). That would seem to over many of the people that stretched to get into over priced starter homes and trade-up homes. Here’s the URL and a paragraph from a study done by the Congressional Budget Office:

http://www.cbo.gov/showdoc.cfm?index=5386&sequence=0

“Until 2000, less than 1 percent of taxpayers paid the AMT in any year. Under current law, however, the number of taxpayers affected by the AMT will grow from just over 1 million in 2001 to nearly 30 million in 2010 before falling back to about 23 million in 2014 after the expiration of the 2001 and 2003 tax cuts.”

“Twenty percent of all taxpayers–and 40 percent of married couples–will owe AMT in 2010. AMT receipts in 2010 will total about $90 billion, roughly 7 percent of total individual income tax revenue.”

“Married couples filing jointly are more likely to have AMT liability than unmarried taxpayers with similar incomes. For example, CBO projects that about 95 percent of married taxpayers with AGI between $100,000 and $200,000 will owe AMT in 2010, compared with 84 percent of single filers in the same income category.”

“Over the coming decade, a growing number of taxpayers will become liable for the AMT. In 2010, if nothing is changed, one in five taxpayers will have AMT liability and nearly every married taxpayer with income between $100,000 and $500,000 will owe the alternative tax. Rather than affecting only high-income taxpayers who would otherwise pay no tax, the AMT has extended its reach to many upper-middle-income households. As an increasing number of taxpayers incur the AMT, pressures to reduce or eliminate the tax are likely to grow. “

[(former)FormerSanDiegan]

As someone who has to calculate AMT every year and pay a little extra because of it … There is no “threshold” for AMT. It is simply a seaparate calculation that you must do and the taxpayer pays the higher of either AMT or their standard taxes.

For AMT calculations things that are excluded include the personal exemptions, property tax, state income tax, Home equity loans and amounts not used to purchase or remodel, and some other items. There is a large standard exemption for AMT (something like 50-60K for a couple).

You can get into the AMT if you make ~ 100K, live in a high state income tax state and have a bunch of children, for example because the exemption for each child is excluded for AMT purposes. A person in this circumstance is likely to pay AMT because they could be subject to little or no income tax under the standard tax code.

If you are a couple with no children making 250K and are renting you are likely not to be subject to AMT. Mainly because you are paying alot of taxes in the standard tax code.

A large mortgage actually helps with AMT, since home mortgage interest is deductible under AMT, (not including cash out or HELOCS used for other than home improvement).
You don’t get to deduct the property tax payment however.

FB’s who would be affected most are not those who recently purchasedat the peak, but those who purchased previously and subsequently did large cash out loans or HELOCS.

[Author]

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