The Democrats Tax Plan

Well, the Democrats have come up with their tax plan. Overall, it’s not too bad (I like the idea of making lawyers and accountants pay into Social Security) but there’s an area that bugzs me. According to this article I found on Bloomberg, the plan calls for a surtax of 4%+ on “wealthy” families. Their definition of “wealthy” is families with adjusted gross incomes over $200,000 per year.

Sure, $200,000 sounds like a lot of money but does it make a family “wealthy?”

I hate progressive taxes.

What Happens if it Costs Too Much to Work?

Today’s WSJ contained the following letter to the editor:

Your June 14 editorial “100% Marginal Tax Rate” caught my eye, as that reality is, in effect, already here for us. Two years ago I came to the conclusion that it was actually costing me money to go to work. As a two-physician couple with two children, we required daily child care in order for both us to work, given our hectic schedules. That child care can only be purchased with pre-tax dollars. Given our dual income, every dollar I earned was taxed at an effective top marginal rate of 51.15% (35% federal, 1.45% Medicare, 6.2% Social Security, and 8.5% state). But it only got worse as we were swept into the Alternative Minimum Tax bracket as well. Living in such a high tax state as Maine, where property taxes and income taxes are some of the highest in the country, exposed us to the AMT tax as our federal tax deductions consist mostly of property tax, excise tax and state income tax payments.

The “Bush tax cut” is a myth, at least for us, as the AMT tax is costing us more money than the small decrease in the top marginal rate returned to us. The more I worked, the more state taxes I paid and the higher the AMT burden became. As an emergency physician, I found that after the state and federal governments took their share along with the AMT tax, I wasn’t making enough money to pay our child-care expenses with pre-tax dollars. Add to that the constant threat of being sued as an emergency physician, it only made economic sense for me to quit my job and take over child-care responsibilities full time. Now I no longer work as an emergency physician or employ a child-care provider (and pay her employment taxes), and our after-tax take-home pay has increased. Who says this isn’t a great country?

J. M., M.D.
Brunswick, Maine

This is what makes the AMT so ridiculous. Since under the AMT, you pay which ever tax bill is the highest, a tax cut could actually force you pay the AMT. Crazy isn’t it?

I wonder how many other families are coming to the same conclusion?

How About a 4.3% Surtax on the “Rich” to Fix the AMT?

Homework assignment: Read Democrats Seek Formula to Blunt AMT

From to the article:

House Democrats looking to spare millions of middle-class families from the expensive bite of the alternative minimum tax are considering adding a surcharge of 4 percent or more to the tax bills of the nation’s wealthiest households.

Under one version of the proposal, about 1 million families would be hit with a 4.3 percent surtax on income over $500,000, which would raise enough money to permit Congress to abolish the alternative minimum tax for millions of households earning less than $250,000 a year, according to Democratic aides and others familiar with the plan.

I wasn’t exactly sure what a “surtax” was so I looked it up. According to, a surtax is:

1. an additional or extra tax on something already taxed.

2. one of a graded series of additional taxes levied on incomes exceeding a certain amount.
–verb (used with object)

3. to put an additional or extra tax on; charge with a surtax.

One thing isn’t clear to me: Is the $500,000 figure “income” or “taxable income?” Based on the 2007 Federal Income Tax Brackets, someone who had taxable income of $500,000 or more would be in 35% tax bracket. Add a 4.3% surtax to that and it brings their total tax to 39.3%.

So, what do you guys think? Is this fair? I’m not sure what I think about this. I’m not a fan of progressive taxation but I don’t have a better answer other than a flat tax.

Think You Might Be Subject to the AMT?

Find out for sure by using the IRS 2006 AMT Assistant. I used it and it works great and is very easy to use.

Here’s some other interesting articles I found regarding the AMT:

Tax Timing – Want to avoid the AMT? Make sure you time your financial decisions right [MarketWatch]

Guide to the AMT [Fairmark]

The Alternative Minimum Tax [SmartMoney]

Will You Get Hit by the AMT?

Every year more and more taxpayers are getting slapped with the Alternative Minimum Tax. Until Congress does something about it, the problem will only get worse. The IRS now has a tool to help you find out whether or not you will be affected by the AMT. I just went through the program (we don’t owe AMT!) and found it easy to use. One thing I will point out though is that it works with the 2005 Form 1040, which is different from last year’s Form 1040.

Good luck!