"I Never Heard Of The Alternative Minimum Tax"

 

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.

Medical Deduction For Nonconventional Treatments

Is a tax deduction available for alternative medical care?

“Alternative” does not necessarily mean unusual. It includes, for example, chiropractic care. As a decades-long gym rat and chiropractic patient, I find that rather amusing.

What does the tax Code want to see before you are permitted a deductible medical expense?

You may ask: who cares? Starting in 2018 more and more people will claim the standard deduction rather than itemize under the new tax law. And – even if you itemize – what is the nondeductible percentage for medical expenses anyway – 2%, 7.5%, 10%, 100% of adjusted gross income? Congress abuses this deduction like an unwanted toy.

I’ll tell you why: because you have flexible spending accounts, health savings accounts and their siblings. To be reimbursable the expense must meet the definition of a deductible medical expense. This is a separate matter from whether you actually deduct any medical expenses on your tax return.

Let’s look at the Malev case.

Victoria Malev suffers from spinal disease. She had seen a chiropractor, but that offered only temporary and partial relief from pain.

You can probably guess the next type of doctor she would see, but Malev wanted nothing to do with surgery and its associated risks.

She instead decided to try four different alternative treatments.

The Court was diplomatic:

… Petitioner subscribed to various forms of treatment from four individuals, none of whom would be commonly recognized as a conventional medical caregiver. And to be sure, none of the methods utilized by these individuals would commonly be recognized as a conventional medical treatment. The methods Petitioner subscribed to might be termed “alternative medicine” by the polite, but we expect the less tolerant would characterize the treatments in other than legitimate or complimentary terms.”

When asked, Malev said that she had greatly improved.

She went to see an M.D a few years later – in 2016 – and the doctor suggested surgery. The doctor further suggested she investigate “integrative” medical care.

Seems to me she was already doing that.

Question: does she have a medical deduction?

The Court pointed out the obvious: had she seen the M.D. first, there would be no issue, as the M.D. recommended she investigate alternative medicine. By reversing the order, she was claiming medical deductions before the (traditional) medical diagnosis.

One can tell that the Court liked Malev. The Court acknowledged her “sincere belief” that the treatments received were beneficial, pointed out that she had not previously known the four providers and there was no reason to believe she would pay them except for the treatments given.

The Court looked at what the Code and Regulations do NOT require of deductible medical expenses:

(1) The services do not have to be furnished by one licensed to practice medicine in any particular discipline;

(2) The services do not have to be provided in-person;

(3) The services do not need to be universally accepted as effective; and

(4) The services do not have to be successful.

Malev could immediately use (1) and (3).

The Court was skeptical, but it wanted to allow for the wild card: the role a person’s state of mind plays in the treatment of disease.

Malev believed. The Court believed that she believed.

She got her medical deduction.

However, in an effort to indicate how fact-specific the case was, the Court continued:

… it is appropriate to note that we fully appreciate the position taken by the Respondent in this case, and [we] consider their position to be more than justified.”

I read Malev as a one-off. If you are thinking of alternative or integrative health care, see an M.D. – preferably an open-minded one – first. It will save both of us tax headaches.