Subject: AMT and Social Security Comment: Sunday, August 14, 2005 Dear Tax Reform Panel, I have just read the article in the Washington Post on the "Creeping Minimum Tax Hard to Justify or Reform." It really does not address the mechanics of the how AMT is calculated and affecting the middle class. What I find incredible is that children, spouses and ourselves are treated as a tax preference item for AMT purposes. How could one come to the conclusion to take taxable income and add back the exemption deductions for dependents to arrive at taxable income for AMT purposes? That is insane. There is real household costs/expenses in having and raising a child. So how is it a tax preference item? Social Security depends on the next generation of taxpayers for the program to be successful. A couple that does not have children does nothing to help social security. Not only don't they sacrifice their time to raise and mold the next generation but that don't have the real after tax dollar costs to raise that child. A $3,100 deduction per child and a thousand dollar tax credit is a drop in the bucket for the costs of raising a child. I find it ironic if not insane how a couple that earns $125,000 with seven kids can pay AMT. (See attached PDF). A single person or couple without kids would not pay AMT. The irony - Children are a must in our society to keep it functioning properly and keep the country continuous. Isn't it ironic how we can treat such a deduction as a tax preference item and penalize the parents who are truly supporting the true meaning of social security in our country. A note on social security benefits and where the discussion and decision making process needs to go: Folks that have children (i.e., parents who raise children) should receive more in social security benefits than folks that do not raise children. As it is now the social security we pay now goes to the social security benefits our parents receive now. Parents do not have the money now to sock away into Roth IRA's and 401(k)s like folks that have not taken on the civic responsibility of raising the next generation. Children are an investment just like the Roth IRA and the 401(k) except for they need much more of our time and money to be sure (hopefully) they are fruitful citizens. Those who have children should expect to get social security benefits and those that don't should be expected to save for retirement. This is the only fair way out of this predicament. And finally, The 15% dividend and capital gain tax rate needs to be capped. The filthy rich have been liquidating companies in the name of dividend pay-outs and cashing in on this loop-hole in the tax law. Even Warren Buffet said it is wrong his secretary pays a higher tax rate than he does. The rich are rich because they make their money off the middle class and the poor. The banking industry makes/takes their money with out-of-control finance charges and interest rates and the oil industry is cashing in this year with all the 6,000 pound vehicles driving around our roads (IRC Section 179 truck/car deduction that was available in 2003 and 2004). Yes, gasoline is at an all time high. (I would be morbidly curious to know how many of Detroit's 6,000-pound vehicles ended up on tax returns somewhere as a straight write-off under this provision of the Code). Yes, Detroit, the auto industry, cashed-in in 2003 and 2004 with this IRC Section 179 program. The cap on the 15% rate should be on the first $50,000 of dividend and long-term capital gain income with the additional amount subject to ordinary income tax rates. Also, the 15% rate is not an AMT tax preference item - unbelievable to outrageous! In closing, The tax law, although complicated, is functional to do with the on-set of computers. More people are e-filing and, therefore, the IRS is not burden with all that data entry work and taxpayers are not burdened with making the computations. The tax law needs to go back to an earlier time when the tax rates were more progressive. Low rates for the poorer in society with gradual increases in the rates. No phase-out rules for interest on student loans, child credits, student credits or any deduction or credit related to children, education or retirement planning. These should all be encouraged regardless of income level. The schedule “A” itemized deductions should stay put. Mortgage interest on principal and second home should continue to be allowed as well as real estate tax paid. Personal Property tax paid should also continued to be deductible as well as state income taxes withheld and paid. Contributions to 501c(3) organizations (Church and Charitable) stay as they are too. The business deduction should also be left alone on the Schedule “A” but do not make it subject to a 2% floor of AGI and do not make it subject to AMT. The big loophole is the tax-free sale of a principal residence every two years that has caused the most havoc in our society. No one is keeping track of their basis on home improvements and, therefore, contractors are being paid cash and not reporting it. The gain exclusion is so great that the $100,000+ in improvements is absorbed in the tax free gain calculation. Our homes should be seen as another source of our retirement income. Once the kids have grown and gone sell the 4 bedroom colonial and move to a two bedroom condo and bank the rest to live on the investment income. Make it a one time tax free gain of say $500,000 for a married couples and $250,000 for singles over 55 years of age. Abolishing the Estate tax is a huge mistake. The estate tax is what keeps this country a democracy. If wealth were to stay in a family from generation to generation it would not be long before the middle class was wiped out and there would be only rich and poor. With the number of folks that die each year only a fraction of less than 1% are affected by the estate tax. This is obviously a special interest matter that has huge implications on our democracy, as we know it. Finally training for IRS agents needs to be uniformed and thorough throughout the country. Hopefully agents have access to online video course instructed training 24-7 to make sure they are on top of their game. There hopefully is a live chat room exclusive for IRS personnel to discuss what issues and situations they are currently dealing with to get resolution and closure to what they are working on. Back in the day IRS would hire a group of agents at given point in time and run the group through the training. They were not equipped to hire an individual agent at specific post of duty spontaneously. Hopefully, IRS has the ability to hire an agent, give them both text and DVD course training, test them online (multiple choice style), put them in office audit for 8 weeks, back to text and DVD field training, then working with a seasoned agent do field work training, and finally set them free. Again they would continue to have 24-7 online training for the issues they need to learn about and online chat room exclusive to IRS personnel to discuss issues. I wish you well in your efforts to bring a sense of fairness/equity to the tax system. You are battling issues that boil down to "Is this right or is this wrong?" What is fair to one person is not necessarily fair to another. The questions need to be asked from the perspective of what is best for the group as a whole. From that perspective you will find a better sense of fairness/equity in developing and applying the tax system. My prayers are with you, Peter Frank |