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Alternative Minimum Tax: A Look Ahead

Be Prepared: The AMT Patch Might Not Get a Patch Job

The Alternative Minimum Tax (AMT) is a classic example of the problem we face when Washington D.C. passes temporary tax legislation. For the past ten plus years, our legislators have passed bills that extend a patch to this parallel income tax calculation within our tax code. At the time of this writing the AMT patch for 2012 has not been enacted. This could be a big tax surprise to millions when they file their 2012 tax return.

What is the Alternative Minimum Tax (AMT)?

The AMT is a separate income tax calculation that adds back several common deductions to your taxable income AND then applies a separate tax rate to this adjusted income. You must pay either your normal income tax OR the AMT tax, whichever is higher. The AMT calculation was originally intended to ensure the wealthiest Americans pay a minimum percent of income in federal taxes. But over time, because it is not adjusted for inflation, the AMT has come to snare middle-income taxpayers. Ironically, the wealthiest are no longer impacted by AMT as normal income tax rates are higher than the AMT rates of 26% or 28%. Without Congressional action it is estimated that over 20 million more people would be subject to the AMT in 2012.

Why is This an Ongoing Problem?

Rather than overhaul the Alternative Minimum Tax, Congress typically elects to raise the exemption level each year to keep the vast middle class from being impacted. Here are the current exemption levels and the corresponding estimated income required until the AMT calculation is phased out;

                 2011

Filing status

Single/HOH

Married/Joint

Married/Sep.

Exemption

$48,450

$74,450

$37,225

Income phase-out

112,500-
306,300

150,000-
447,800

75,000-
223,900

   2012


Filing status

Single/HOH

Married/Joint

Married/Sep.

Exemption

$33,750

$45,000

$22,500

Income phase-out

112,500-
247,500

150,000-
330,000

75,000-
165,000

 

 

  • The Exemption amounts are a level of income that is excluded from the AMT calculation. Amounts above the exemption are subject to a static 26% AMT tax rate. AMT adjusted income in excess of $175,000 is subject to a flat 28%.
  • Notice there is a significant Marriage penalty in the AMT calculation. This penalty is even worse in 2012.
  • The top marginal income tax rate in 2012 is 35%. That is why the AMT no longer impacts most wealthy taxpayers.
  • Some of the main add-backs to your regular income for the separate AMT calculation are: state & local taxes paid, mortgage interest on home equity debt, miscellaneous expenses, medical expenses, net operating loses and investment expenses.

What Can You Do?

Unfortunately there is very little you can do about the inaction out of Washington D.C. Most are still hopeful an AMT patch will once again be applied retroactively for 2012. If you think you may be impacted by the AMT surprise please call to review your situation.

For assistance with this or other tax or accounting matters please contact us at 201-947-8081 or 646-688-2807, or email us at info@ourcpas.com.

 

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