The REAL Fiscal Cliff
For months some people (mostly Republicans) have been screaming that we must do something about the expiration of the Bush Tax Cuts before the end of the year "or else." As I have explained in a previous blog, this is just political posturing and propaganda.
However, there is tax policy problem that does need to be fixed right away, and definitely before the end of the year. That is that pesky Alternative Minimun Tax (ATM). I have been hit with it a few times myself. Also, I was in the tax preparation business for ten years and saw so many extreme examples of people being most unfairly ensnared by it. The most egregious examples I have seen of it have been suffered by people with large casualty losses. I have such terrible results of it that I have come to think of it as the "Hit a Man while he is Down Tax." A farmer lost a large barn to fire. His loss was double what his income would have been had he not had the loss. Naturally he owed $0 in the regular income tax, but he owed a large ATM. See what I mean about hitting a man while he is down? This particular example seems to have been fixed, as Casualty and Theft losses no longer need to be added back, but even today such a loss would cause problems when he tried to apply the net operating loss to another year because net operating losses have to be added back.
The way the ATM is structured, certain losses deducted on Schedule A are, for the purposes of the ATM, considered naughty deductions and have to be added back to income. At the present time, these include certain medical and dental expenses, state and local taxes, certain mortgage interest adustments, and certain other deductions. See form 6251 instructions for details. Certainly the Medical and Dental amounts and state and local taxes need to be removed from this treatment. Oddly enough, "Gifts to Charity" do not need to be added back, although I think they should. But that is the subject for another entire blog. Then there is the matter of the exemption amounts which need to be adusted for inflation.
Of course, the easiest way to fix the ATM would be to abolish it forever, but that would be too simple for those in Washington. The ATM was originally passed in 1969 to prevent certain individual from avoiding taxation. It has failed its original mission miserably, but it continues to burden honest taxpayers unfairly.