Because I must know the economic implications of the tax codes, I have been doing my own taxes for many years.  I certainly use a computer, but last year’s efforts usually help this year’s outcomes.  Not much this year. 

In calculating my charitable deductions, I must first determine if I had a carryover of unused deductions because contributions may have exceeded the 30 percent contribution limit, unless, of course, I am eligible for the 50 percent limit relative to adjusted gross income.

If I contribute appreciable assets, I must know if it is the 30 percent maximum variety or the 20 percent kind. 

My investment returns depend upon  my income, when I made the transaction, and how long I held the asset.  And all of this changes if I fall into the dreaded alternate minimum tax. 

Some of my dividends are ordinary while others are qualified.  And whether I sold an asset soon after I received its dividend also matters. 

For the first time in my life, I fell into the alternate minimum tax.  To be sure, I had a natural gas investment that created a preference item. 

However, I had a similar type investment a few years ago that did not throw me into the alternate minimum tax (AMT).  By the way, this generates another carry forward of deductions that were not effectively used if I ever fall out of the AMT.

I probably will not make another natural gas investment this year, so I may actually get to use some of the tax breaks that were supposed to stimulate exploration.  But I will lose the time cost of money. 

Aside from joining half the population in screaming about the tax code, how do these observations relate to the economy?

If you follow my above discussion, you will notice that I did not know the after tax return from my investments until I completed my tax form.  Not only did the returns depend upon the natural risk of the investment, but also upon my income, how long I held the investment and whether other income and deductions pushed me into the alternate minimum tax. 

In other words, there was tax uncertainty in determining the true return to my investment. 

Obviously, such tax distortions increase the difficulty of making prudent investment decisions.  The very complexity of the tax code may be stifling economic decisions. 

Also, the time used to finish my tax returns was almost three times the time used last year.  Hopefully I did not overlook anything or make any errors.  However, I am no longer sure I can spot any errors if they occurred.  Americans can use their time more fruitfully than complying with these increasingly complex tax codes.

Furthermore, I used my computer program to determine what preference item pushed me into the AMT this year when a similar gas investment did not do so a few years ago.  It was the state and property taxes that I paid.  In other words, I was not able to receive full benefit for all my deductions (a consequence of the AMT) because my other taxes rose.  This fails the fairness test. 

To be sure, a similar adjusted gross income led to more likelihood of falling into the AMT because of differences in the regular and AMT codes.  As everyone knows, the regular code has had reduced marginal rates and is indexed for inflation. 

What many may not know is that the AMT marginal rates have not declined and they are not inflation adjusted.  As a result, the gap between the regular and AMT rates is narrowing. 

Two years ago, 1.6 million households paid the AMT.  This year it will be 3 million.  In ten years, it might be 30 million.  For these people, there has not been a tax cut.

And anyone who wants to make the current tax code permanent must be crazy.  When will we get relief from this complexity and this tax effect uncertainty upon investment decisions?