Although the AMT was created for a specific purpose, its design and function is beginning to fail. For example, since tax bills of the rich are most likely over the AMT rates, the AMT has ceased to affect them. Instead, the inflation-adjusted AMT has begun to target 4 million to 5 million taxpayers with annual incomes between $200,000 and $1 million. Without an adjustment for inflation (or a "patch"), the AMT will possibly affect 28 million taxpayers this year, reaching deeply into the middle class – and increasing taxes for families it was never meant to reach.
How Failing to Patch the AMT by Year-End Will Jeopardize the 2013 Filing Season
Acting IRS Commissioner Steven Miller has emphasized the significance of patching the AMT by year-end. He stated that, without a timely patch, the IRS would have to operate the 2013 filing season based on the expiration of the current patch (reverting to 1998 figures) which would result in filing delays and subject approximately 28 million taxpayers to a large and unexpected tax liability for the 2012 tax year. Also, in order for the IRS to make the necessary changes to its tax programs, filing of tax returns would likely be delayed until late March of 2013. This, in turn, will delay the issuance of refunds for over 60 million taxpayers.
For tax year 2012, if not "patched" the individual AMT exemptions will fall to the permanent AMT amounts unless Congress retroactively changes them. The permanent amounts are: $33,750 for unmarried taxpayers (compared to $48, 450 in 2011 - reduced by 25% of the amount for which AMTI exceeds $112,500 in both years), $45,000 for joint filers (compared to $74,450 in 2011 - reduced by 25% when AMTI exceeds $150,000), and $22,500 for married filing separately (compared to $37,225 in 2011 - reduced by 25% in both years when AMTI exceeds $75,000).
States with high income tax rates will be hit the hardest. For example, in the District of Columbia and Maryland, where approximately 6 percent of taxpayers have become accustomed to paying the AMT, the figure would jump to 41 percent in D.C. and 38 percent in Maryland. In Virginia, where 4 percent of taxpayers have routinely paid the AMT, the figure would increase to 28 percent.
Residents in other high-cost areas would also get hit hard by AMT. In New Jersey, for example, more than half of all households would owe unexpectedly large tax bills, the highest percentage in the country. (Source: The Washington Post)
What is the Alternative Minimum Tax?
The AMT is best understood as a separate tax system, computed on IRS Form 6251, with its own rules for deductions as well as its own set of tax rates. The AMT starts with your regular taxable income and then adds back the tax preferences and adjustments until you arrive at “alternative minimum taxable income” (AMTI). After subtracting an exemption amount, a tax rate of 26% applies to the first $175,000 of this income and 28% to amounts above $175,000. If the tax liability under the AMT system is higher than your regular tax liability, you must pay the higher amount. If it is below, then you pay the regular tax amount owed. The excess of the tentative minimum tax over the regular tax liability for the tax year is the AMT.
Below are some of the most common adjustments and preferences used to arrive at AMTI. If you currently take advantage of any of these deductions, pay special attention to the possibility of paying the AMT this year.
Tax Exempt Interest: Although excluded from your regular taxable income, it must be included in AMTI.
Interest Deduction: For AMT purposes you can only deduct mortgage or home equity loan interest on funds you used to buy, build, or substantially improve your home or second residence.
State and Local Tax Deduction: For AMT purposes you get NO deduction for state and local income taxes, or real estate or other property taxes, although a deduction is allowed for regular tax purposes.
Medical Expenses: For AMT purposes, they are only deductible to the extent they exceed 10% of AGI. For regular tax purposes, medical expenses are deductible to the extent they exceed 7.5% of adjusted gross income (AGI).
Misc. Itemized Deductions: For AMT purposes, you do not get ANY deductions.
Personal and Dependency Exemptions: You do not get ANY deduction for AMT purposes and must be added back to your regular taxable income to determine AMTI.
Standard Deduction: If you take a standard deduction instead of itemizing, you must add the deduction back in to determine AMTI.
Global Advisory Tax Group will continue to post updates as they become available. If you have any questions about AMT or any other tax issue please contact us at firstname.lastname@example.org or 412-904-2696.