By Matthew Campione, Principal of SmolenPlevy and Contributing Writer for Forbes.com

Article originally published on Forbes.com.

About this time next year, many taxpayers will be just getting over the shock of paying perhaps thousands of dollars and more in 2012 income taxes because of the Alternative Minimum Tax (AMT). The amount of additional tax and number of taxpayers affected, will substantially increase if Congress does not increase the 2012 AMT exemptions as it has done for prior years. I know eyes glaze over when people hear AMT, but it is fairly simple to explain.

Picture the USA and a parallel universe: AMTUSA. Actually, I will make it simpler than this. Federal income tax law requires taxpayers to calculate income tax liability under one set of rules and then calculate income tax liability under another set of rules, AMT. The taxpayer is then required to pay the higher of the two results. So really it is parallel rules in the same universe.

The expressed purpose of AMT is to limit taxpayers from reaping too much benefit under the regular income tax law. For purposes of AMT various deductions, exemption, income exclusions and credits for regular income tax purposes are eliminated or reduced in calculating tax under AMT. AMT also has its own tax brackets; for individuals, AMT taxable income up to $175,000 is taxed at a 26% rate and AMT taxable income in excess of $175,000 is taxed at a 28% rate.  However, many feel AMT as currently configured does not fulfill its expressed purpose because it usually affects mostly middle and upper middle income taxpayers. In short, the explanation for AMT has nothing to do with how it actually works. So, again, AMT is simply a parallel set of rules (in the same universe) that usually affects middle and upper middle income taxpayers. Are you with me so far?

Many individual taxpayers have higher income tax liability under AMT because state income taxes and property taxes are not allowed as deductions for AMT. Some legislators have suggested the elimination of state income tax and property tax deductions for regular tax purposes. This would make the regular tax more like AMT. This could lead to one set of income tax rules with regular tax liability more like the tax liability under AMT.  So we could end up with only one set of income tax rules in the same universe.

Admittedly, the above explanation is an oversimplification of AMT. Taxpayers should know their specific tax footprint and be aware of the AMT adjustments that are applicable to their situation. If there is potential for significant AMT tax liability you should (have your accountant, or tax attorney) run projections of AMT and regular tax liability. Through tax planning items of income and deduction can be eliminated or reduced, or accelerated or deferred between tax years to reduce overall tax liability.

So why do taxpayers like Warren Buffett and Mitt Romney not pay additional tax under AMT? This is because preferential income like qualified dividends and capital gain are subject to the same preferential rate of 15% for AMT as well as for regular tax. This seems to be inconsistent with the expressed purpose of AMT. The Buffet Tax, witch did not make its way out of the Senate, would have required wealthy taxpayers with substantial preferential income to pay more tax. Does this mean the rich are in a different world for tax purposes as compared to the rest of the population?

By Matthew Campione, Principal of SmolenPlevy and Contributing Writer for Forbes.com

Article originally published on Forbes.com.

Suppose the United States started printing money to cover costs instead of borrowing. This would be a way to alleviate deficit and debt ceiling problems. Better yet, taxes would not have to be raised and budgets would not need to be cut. In theory, the problem would be that the value of our currency would go down. It would take more money to buy things and the value of US treasuries would go down because debt obligations can be paid off with cheaper dollars. Clearly, we would view other nations negatively if they tried to do this. But for the United States, it may be a question of degree and how it is presented. Enter Quantitative Easing.

From December 2008 to the end of last year, total US debt increased from $10.7 trillion to $15.2 trillion, an increase of $4.5 trillion. However, only $2.9 trillion of this amount was borrowed from investors; the $2.9 trillion came from US investors, insurance companies and more than half from foreign countries and international investors. The remaining $1.6 trillion came mostly from the Federal Reserve.

The Federal Reserve acquired most of this US debt by simply creating dollars. This infusion of cash is suppose to be temporary because the Federal Reserve expects to be paid back from US revenue (not very likely), or a sale/ refinance of such US obligations to investors (relatively more likely). Absent substantial growth in our economy it is likely the Federal Reserve will hold this debt (and perhaps additional debt from another infusion through Quantitative Easing) for an indefinite period of time.

When it comes to debt the US owes to itself (over $6.4 trillion), it can avoid default by extending such debt in a variety of ways. So investors really have to worry about the United States meeting its obligations on closer to $9.5 trillion. We are still by far the largest economy in the world and this amount is less than 65% of our gross domestic product (GDP). Worldwide investor demand for US obligations is still enormous because of perceived minimal risk relative to other currencies/economies, and interest on such obligations is at historic lows despite the investment rating of Treasury obligations being downgraded last summer.

So far (manufacturing currency through) Quantitative Easing by the United States has been accepted by investors and other countries, and perhaps another round of Quantitative Easing would be acceptable as well. I must caution other countries that Quantitative Easing is risky and they should not try this at home. (The European Union should not do this because of issues related to multiple sovereignties.) However, there will be a limit on how much Quantitative Easing will be tolerated if the federal government continues to have large annual deficits and US debt held by investors approaches and exceeds GDP.

By Matthew Campione, Principal of SmolenPlevy and Contributing Writer for Forbes.com

Article originally published on Forbes.com

If agreement is reached this session of Congress, it is likely tax legislation will result in substantial tax cuts for the rich. Depending on the mix of a rich taxpayer’s income, this may be so even if the “Buffett Tax” was enacted as part of the new law.

How can this be when the Democrats control the Senate and Obama is president?

The answer is really simple. If Congress reaches agreement, it is likely the new tax law will not be as severe on the rich as the expiration of the Bush tax cuts in 2013. If the Bush tax cuts are allowed to expire the highest marginal income tax rate will go up from 35% to 39.6%, and the capital gains rate will generally go up from 15% to 20%. Very significant, qualified dividends will no longer be taxed at capital gain rates. Instead, dividends will be taxed at the recipient’s marginal rate up to 39.6%.

If the federal estate tax is not repealed, 2012 changes would likely include a reduction of the maximum estate tax rate from 55% to 45% or perhaps 35%. This would allow the wealthiest of families to each save millions, tens of millions or even hundreds of millions in estate tax liability. The lifetime estate and gift tax exemption for 2013 is likely to be reduced from its current unprecedented high of $5.12 million per spouse which Obama agreed to in December 2010. In fact the exemption may not be much more than the $1 million per spouse exemption if the Bush tax cuts are allowed to expire. But the wealthiest Americans will have had the benefit of using the higher exemption amounts through gift and generation skipping tax planning for 2011 and 2012. Estates with not much more than a million dollars could be subject to estate tax liability after 2012. People at this level of wealth are less likely to use or afford tax planning more commonly used by wealthier ($10 million and up) families. While for most people a million dollars is a fortune, for the truly rich, this is not wealthy. Such a low exemption amount will make it more difficult for families to accumulate wealth and retain assets for the benefit of their children and descendents.

Unrelated to the above, Congress should immediately address the alternative minimum tax (AMT) exemption, commonly referred as the “patch”. Without the patch middle and upper middle income families will pay as much as $100 billion more in income taxes for 2012.  If Congress is going to address tax legislation it should address more imminent tax issues.