Before I start down this path, let me say that I consider myself very fortunate. What follows is meant as a critique of the U.S. tax code, and should not be read as a personal complaint, although, I must say that I do find this situation both frustrating and perplexing.
Today is tax day. Yesterday our returns were finally completed by our tax advisor (the reason that they were so late is another story which I will cover at a later time), and it turns out that we owe... wait for it... over $12,000. Yikes. So how could this be? A number of reasons but here is the biggy: Alternative Minimum Tax. Good ol' AMT.
Yes, in absolute terms my wife and I make a very good living. Most people in this country would trade places with us pretty quickly. In other parts of the country our income would certainly make us wealthy, however, here in Silicon Valley we are not even close to wealthy. As readers of this blog know, I have written many times against buying a house as an investment. My wife and I rent. However, on Sunday we went to see a model house in a new development in our neighborhood. Let me put things in perspective. The house, while new and nice, was a three bedroom townhouse, with no yard. The cost? $1.3 million. Let me be very direct here: there is no way on earth that we can afford to pay that price for a house (or for anything else), and this was NOT a fancy house.
So here is the way I see it. We cannot afford to buy even a modest house in the town in which we live - in my mind that means that we are not wealthy. However, because we have three kids and live in a state with high income taxes (California), the Federal Government considers us wealthy and hits us with the penalty rich man's tax.
In my business travels, I spent much time in South Carolina, Ohio and other places around the country. If we made anywhere near our income level elsewhere in the country (with the exception of Manhattan), we would be able to afford very nice houses, and could legitimately be considered wealthy. However, here in Silicon Valley we are simply middle class.
Why is the Federal tax code not indexed for cost of living in the various states? Why are citizens living in expensive parts of the country being penalized?