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Taxes aren’t just complicated for the wealthy, either: At the end of 2012, the government created two more tax rates for capital gains, two more tax brackets, and started limiting deductions you can take in interest and property taxes as you make more money.
Long story, short? There are a ton of variables that make paying taxes way harder than simply calculating a percent of your income.
How the Tax Code Impacts Real Lives
I have a client who is approaching 90 and receiving a pension distribution. Depending on when she retired, she could have owed no taxes on this income, partial taxes or full taxes. It’s very important that she and other older folks living on a fixed income see a CPA.
After reading a rather vaguely reported tax form, this client’s daughter misunderstood and told her mother she didn’t owe taxes for three years. Well, the government labeled my 85-year-old client a tax evader and fined her $5,000. She only makes $10,000 a year.
Here are some suggestions to make the tax code clearer and fairer:
1. Eliminate the AMT
There are other ways to make sure the wealthy pay their fair share of taxes. The AMT isn’t really necessary, and it’s unnecessarily confusing. Not to mention that it increasingly hurts the middle class. The original legislation that created the AMT didn’t account for inflation, so it has gradually ensnared more of the middle class. In 1970, only about 20,000 people paid the AMT; 4 million paid it in 2011.
Last month, Congress passed a law indexing the AMT to inflation, but I believe it will still envelop more taxpayers over time. Just look at history: Congress has repeatedly “patched” the AMT to try to prevent this “creep” that keeps enveloping middle class taxpayers, and yet look at the ever-growing numbers!
I think it’s better to get rid of the AMT entirely and simply make tax brackets that are transparent.