Many Oregonians could be hit by a big surprise next Tax season. It's the Alternative Minimum Tax (AMT), which was originally designed to hit only the ultra-wealthy. Well guess what. You're probably considered "Ultra-wealthy".

The AMT  is trapping an alarming amount of the middle class, especially those who own homes and live in states with high income tax rates. This includes Oregon. And it's getting worse. Pretty soon, over half those with incomes between $75k-100k could be victimized by the AMT.

So what is AMT, and what do we need to watch out for?

The AMT was first enacted nearly 40 years ago to ensure that wealthy taxpayers pay at least some federal income tax versus sheltering their entire income with big write-offs. This strategy worked at the time, but AMT has never been indexed for inflation, resulting in more middle-income taxpayers owing the additional tax.

All of us go through the AMT test each year. Our income is matched up with the tax brackets it falls into and the tax owed is calculated. But we also go through a second calculation: the AMT calculation. Many deductions are eliminated and the tax brackets are reduced. The tax owed under AMT is then compared to the tax owed under the bracket calculation. Then we pay the higher two taxes.

More individuals will pay the higher AMT tax since it does not allow deductions such as certain interest on some home loans, property taxes, state and local income taxes, standard deductions, or personal exemptions for children and dependents that are normally deductible under the regular tax brackets. As stated earlier, certain interest on some home loans will be wiped out under the AMT. There are two types of home loans that can be eligible for tax deductibility.

First, there is Acquisition Debt, which allows interest to be deductible on a loan used to acquire or improve your primary or second home, with a loan limit of $1 million dollars. The good news about Acquisition Debt is that it remains deductible, even if you are subject to AMT. This makes Acquisition Debt very valuable. But once you pay off or reduce the balance of your Acquisition Debt, it is gone and only the interest on the remaining portion is deductible. So taking out a new loan at a higher amount will not give you that precious Acquisition Debt back.

The next best thing to Acquisition Debt is Home Equity Debt. Home Equity Debt has a limit of $100,000, which can be used over and above the Acquisition Debt Balance. And Home Equity Debt is flexible in that you can pay it down and pull it back out, which is not allowable for Acquisition Debt. But Home Equity Debt is eliminated under AMT. And with so many people being trapped by the AMT and also having loan amounts higher than what was used to acquire the property, the lost deduction is significant.

Congress usually passes an AMT "Patch" to help adjust for the increased amount of tax payers who become subject to AMT each year. This year is no different. The Democrats are trying to get HR3996 passed but the Republicans are against it. The Republicans state that the bill is flawed and includes other tax increases and would rather see a solution rather then an annual patch. Here are a couple of links for "both sides of the story" provided by OregonLive, the online voice of the Oregonian.

Democrat

Republican

I urge you to write you politicians and encourage them to come up with a separate AMT solution that is not tied to other "fixes". Just a simple AMT Cost of Living adjustment to protect the middle class.

How to find you:

House Representative

Senator


It's always good to check with a tax professional about your own personal scenario, and learn how this impacts you. If you need a referral to a tax pro, I'd be more than happy to make a suggestion, just give me a call!

Larry Morris, CMPS
www.PDX-Mortgage.com