Will you have to pay the AMT (Alternative MinimumTax)???

The Alternative Minimum Tax was created almost 40 years ago and targeted high income households. The real reason AMT was created was to try and catch those wealthy folks who could shield their money from Uncle Sam through the use of various deductions.

Here is the catch, the AMT has not been adjusted for inflation like regular taxes. It is estimated that if congress does not make changes to the AMT by 2010, half of those earning between $75-100K will have to pay it!

It is difficult to determine if you will have to pay the AMT, you have to do your taxes under the regular tax rules and under the AMT rules. If the AMT tax is higher, that is what you have to pay. A faster way, is to use the AMT Assistant on the IRS's website (http://www.irs.gov/businesses/small/article/0,,id=150703,00.html).

Here are some things that make you more Iikely to pay the AMT:

• If you are in a higher income tax bracket
• If you take a large number of dependent exemptions
• If you have other substantial deductions
• If you deducted interest on a 2nd mortgage not used for residential purposes
• If you live in a high tax state
• If you exercised stock options and did not sell them the same year

Investors should be concerned about the AMT but shouldn't base their investments around it. If you're a baller with fat stacks in your pocket, you should spread out your gains and plan your income and deductions. Also, don't fall into the trap of buying municipal bonds from your financial advisor when he promises you AMT-free interest. Not all municipal bonds have that feature. Yes it's a drag, but always be sure to read the prospectus YOURSELF!!

You can learn more about the AMT, Tax Topic 556 at: http://www.irs.gov/taxtopics/tc556.html

Obama's stimulus plan and you

You've heard about it in the news by now and maybe even read some detail about what the stimulus plan will contain (http://readthestimulus.org/amdth1.pdf). Have you stopped to think what this means to America and you in the coming years? Someone always has to pay back debt. This is the fundamental reason why banks are in business. The United States government is here to bail out many industries but who will help the US fund the enormous amount of money it is about to spend?

Aside from your taxes likely going up (a good reason to be in a Roth IRA or Roth 401K...to be covered in another post), the US needs to "raise" the money for the stimulus from somewhere. This is done through the sale of US Treasuries, typically to foreign nations.

Take a moment and consider the following points that affect our nation right now:

• The projected US federal deficit is $1.5 trillion in fiscal 2009 and $1.25 trillion in fiscal 2010.
• The Treasury will have to issue nearly $3 trillion in debt to keep the US moving along.
• Foreigners have bought nearly 2/3 of US debt in the past.
• China alone held $696.2 billion in US Treasury Securities at the end of December 2008 and Japan held 578.3 billion. This is more debt than the UK, Germany, France, Brazil, Russia, Taiwan, Mexico, Italy, Sweden, Canada, Korea, India, Belgium and many other nations hold COMBINED.
• The rates paid on US debt today are at rock bottom lows.

Now ask yourself this, if the outside world is looking at the US and seeing its industries crumble (auto, banking, airlines, etc), how interested do you think they are going to be in buying billions more US debt that pays extremely low rates?

OK, never mind if they want to buy it, many nations CANNOT buy it. Natural resource producing nations have had their income crushed by declining prices. Look at oil for example....$34.67/barrel at the time of this writing. Don't like that excuse? How about the major economies that relied on the US export market to pile up money? These nations then "recycled" those funds and bought more US debt. Well, if you haven't noticed, the export market sucks right now so those nations don't have a surplus to spend with the US.

The point is that whether nations don't want to buy US debt or cannot buy US debt, the US is going to have trouble funding the next 2 years. The best way to encourage nations to buy US debt is to raise the interest rates and provide higher yields. Everyone knows what happens when we go down that path. Inflation.