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The Buffett Tax: Re-Defining the AMT?

Written by Nickel - 6 Comments

The Buffett Tax: Re-Defining the AMT?

In case you haven’t been paying attention, President Obama is expected to announce a bevy of proposed changes that are aimed at reducing the deficit. Perhaps the most intriguing of these is the so-called “Buffett Rule,” which will be a new minimum tax rate for individuals making over $1M/year.

Details still aren’t available, but it sounds like this new rule (if adopted) could do what the Alternative Minimum Tax (AMT) was intended to do when it was introduced back in 1969 – i.e., prevent the richest households from getting off with little or no tax liability despite being in a high income tax bracket.

Here’s what the IRS says about the AMT:

The tax laws give preferential treatment to certain kinds of income and allow special deductions and credits for certain kinds of expenses. The alternative minimum tax (AMT) attempts to ensure that anyone who benefits from these tax advantages pays at least a minimum amount of tax.

Unfortunately, the AMT was never indexed to inflation, so there’s a mad scramble every year by Congress to patch the law and increase thresholds. Even still, the AMT currently hits millions of taxpayers that it was never intended to hit.

Not surprisingly, the Buffett Rule has already stirred up a ton of controversy, and the details aren’t even known yet. Setting politics aside, I’m intrigued by the possibility of replacing the AMT with a new system that actually does what it’s supposed to do. I’m definitely curious to hear more.

Published on September 19th, 2011
Modified on September 25th, 2011 - 6 Comments
Filed under: Taxes

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6 Responses to “The Buffett Tax: Re-Defining the AMT?”

  1. 1
    The Biz of Life Says:

    The ATM is a mess with lots of unintended consequences that has injured people it was not intended to punish….. not to mention it is help keep many accountants and tax preparers employed trying to figure out how to apply the ATM. The US tax system is a mess. This does nothing to simplify taxes and just adds complexity, and will probably have some not so desirable unintended consequences,

  2. 2
    jim Says:

    I do agree that the current AMT does need reform with a permanent inflation index. But the current AMT is really not as bad as people act like. Less than 4% of the tax filers pay AMT. Worst case AMT is a 29% rate which is lower than the top marginal rate. The vast majority of people paying AMT are high income households. I don’t think theres even 1 million households making less than $200k subject to AMT. And for those people it generally takes something unique in their tax situation to hit AMT, like very large unique deductions or large gains/losses or something like that. AMT really doesn’t just hit typical middle class people with plain tax situation.

  3. 3
    Evan Says:

    Good thing he started to stir things up when he is around 80…and not when he was a billionaire in his 50s or 60s lol

  4. 4
    Nickel Says:

    Evan: 30 years ago, the income tax structure was quite different from today, so perhaps he liked it better back then.

  5. 5
    BG Says:

    “AMT really doesn’t just hit typical middle class people with plain tax situation.”

    As long as Congress keeps ‘fixing’ it every year, then you are right.

    This allows the Congressional Budget Office (CBO) to make deficit predictions as if the AMT weren’t ‘fixed’ each year. And it allows Congress-critters to claim that they ‘lowered taxes’ every year when they ‘fix’ AMT.

    Everyone is ‘rich’ using the non-inflation adjusted numbers from the original 1969 law…

  6. 6
    Kevin@RothIRA Says:

    Call me cynical, but when ever congress (or anyone)starts talking about raising taxes we all need to run for cover. They’ll frame it in tax-the-rich speak, but ultimately, when they realize there aren’t enough rich people to tax to get the desired result, they’ll find ways to expand it.

    This is an excellent time to begin maximizing tax shelters, like retirement plan contributions. It’s often easier to move money before the “reforms” hit and it’s too late.

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