I am looking at a case that involves the alternative
minimum tax.
While it still exists, much of the steam has thankfully
been taken out of the AMT. It started off as Congressional reaction to a
handful of ultrawealthy families paying little to no income taxes decades ago.
Congress’s response was to require a second tax calculation, disallowing certain
things – such as exemptions for your dependents.
Yes, you read that correctly, you large-family tax
scofflaw.
Now, it wouldn’t be so bad if this thing had been scaled
to only reach the wealthy and ultrawealthy, but that is not what Congress did. Congress
instead gave you a spot, and then you were on your own. For 2017 that spot was
approximately $84 grand in income for marrieds filing jointly.
I used to see the AMT as often as a Gibson’s employee
sees donuts.
Thankfully the Tax Cut and Jobs Act of 2017 did a
couple of things to defang the AMT:
(1) It
increased the exemption (that is, the spot) for everyone. Marrieds now have an
exemption of approximately $115,000, for example.
(2) More importantly, it adjusted a previous rule
that phased-out the exemption as one’s income increased. For example, marrieds
in 2017 would start phasing-out when their income reached approximately
$160,000. Now it is over $1 million, which makes a lot more sense it if was
truly targeted at the wealthy.
Why the absurdly low previous income thresholds for the
AMT, especially since it was supposed to target the “rich?” Think of it as
Congressional addiction to paper crack – the paper being your dollar bills.
The tax law is a little saner until 2026, when the
TCJA goes “poof.” Much prior tax law will then resurrect – including the previous
version AMT.
Robert Colton and Alina Mazwin (R&A) filed a joint
return for 2016.
The IRS did its computer matching and sent them a
notice. There was $125,000 reported by JP Morgan Chase Bank. The IRS wanted
taxes on it.
R&A explained to the IRS that the $125,000 was a
legal settlement, and that half of it went to Mr Colton’s ex-spouse.
The IRS said OK, but we want taxes on the $62,500.
Let’s take an aside here. You may have heard that lawsuit
settlements are not taxable. That is only partially true. The lawsuit has to
involve physical injury (think a car crash, for example) to be tax-free.
It appears that Mr Colton’s settlement was of the
non-car crash variety, meaning that it was taxable.
R&A then amended their 2016 return, picking up the
$62,500 but also claiming a miscellaneous itemized deduction of $80,075 for attorney
fees.
Hah! They might even get a tax refund out of this,
right? Take that, IRS.
Except …
Guess what is not deductible for the AMT.
Yep, that miscellaneous itemized deduction.
So – for AMT purposes – their income went up by the
$62,500 but there was no deduction for the related legal fee.
How much income did R&A have before the IRS
contacted them?
About $40 grand.
Yep, the AMT had been bent so far beyond recognition
that it trapped someone amending a return to show perhaps $100 grand in income.
Folks, that income level does not go you invited to the
cool parties on Martha’s Vineyard.
Let me share a line from the case:
Petitioners stated in
their petition that ‘[they] never heard of [the] alternative minimum tax.”
I get it. I consider it unconscionable that an average
person has to hire someone like me to prepare their taxes.
Our case this time for the home gamers was Colton
and Mazwin v Commissioner, T.C. Memo 2021-44.
