Personal Finance QuickTake: Uneasy Feeling

Yahoo had a really good article today talking about consumer sentiment. Basically even through the housing boom and access to way too easy credit, consumer sentiment has been a bit wary. It was almost like everyone knew this was too good to be true.

Easy credit has led directly to a disconnect with consumer's paycheck and their ability to spend. Gas prices rise, which raises price inflation food and travel, heap on medical expenses running at high double digit growth and a melt down is inevitable.

This is called...inflation.

The problem is you don't fix inflation by lowering interest rates! You do by raising them. This puts our Fed in a bit of a bind. If the raise rates the economy tanks, if the lower them inflation goes nuts.

How bad can inflation get? Picture Europe before WWII. Literally wheelbarrows full of money to buy bread! Not worth the paper it is printed on...Not saying go dig a trench and hide, it it foretells of tougher times ahead. It also says that this doesn't get fixed with a $1200 check from the Government.

How do we cope? Get out of debt. Save and spend less than you make. Not sexy but it works!

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AMT, it isn't just for Breakfast anymore...

Congress passed the Tax Reform Act of 1969 and introduced the Alternative Minimum Tax targeted at 155 high wealth families that basically were using every tax loophole to, although legal, avoid paying any real Income Taxes. Basically it isn't really even a tax, it is a way for the government at a certain income level and tax liability quotient to dis-allow exemptions.

Brilliant!...Except for one, teeny , tiny little issue...They didn't index it for inflation. Meaning that if the threshold was $150,000 in 1969, it is $150,000 in 2007! Never mind that $150K in 1969 dollars equals nearly $500,000 (actually $461,217.50 based on 3% inflation over 38 years)!

So what happened is every year it snagged more and more families. Well not much political will when it gets the top 155 families or the top 300, top 500 even, but top 2 million...oops!

"Over the coming decade, a growing number of taxpayers will become liable for the
AMT. In 2010, if nothing is changed, one in five taxpayers will have AMT
liability and nearly every married taxpayer with income between $100,000 and
$500,000 will owe the alternative tax. Rather than affecting only high-income
taxpayers who would otherwise pay no tax, the AMT has extended its reach to many upper-middle-income households. As an increasing number of taxpayers incur the AMT, pressures to reduce or eliminate the tax are likely to grow."

That was a quote from the Congressional Budget Office in 2004...sound familiar. It should, it literally comes up every year and nothing is really being done.

Problemo #2 is that it now pulls in a ton of tax dollars now. In case you had not heard Congress prefers to keep the coffers filled, this would be a major hit to scrap and go back to the original purpose.

How much moola are we talking about? Over the next 10 years between $850 million and $1.5 Billion! Enough to buy every man, women and child in the country a not-so-Happy Meal.

This will continue to be a hot button until it gets solved, Congress barely got this year's patch on AMT this year passing it a few days ago. Given the last minute nature of this, tax refund this year could be delayed up to four weeks according to the IRS.

This is really a great question for everyone to press on to their Congressional Representatives.

"What are you doing about the AMT?" Cause it isn't just for the Rockefellers anymore...