2010 CCH Whole Ball of Tax
AMT Still to be Reckoned With
(RIVERWOODS, ILL., January 2010) – The AMT, or alternative minimum tax, is one part of the tax system that everyone condemns, yet it seems to be immortal. Democrats and Republicans alike say that the AMT has got to go, but getting rid of the AMT will not be easy. A series of short-term “fixes” has kept millions of taxpayers from the clutches of the AMT in recent years, but a permanent solution to the dilemma is still elusive, according to CCH, a Wolters Kluwer business and a leading provider of tax, accounting and audit information, software and services (CCHGroup.com).
Quite simply, the AMT is an alternate way of figuring your income tax. It’s the legacy of an era when tax rates went as high as 91 percent and the tax code was full of loopholes for the wealthy.
“At that time, every tax season brought news accounts of fabulously wealthy individuals who paid no tax whatsoever. The system that eventually was devised is basically a parallel tax universe. Things that are deducted in figuring regular tax are often added back in figuring the AMT, and things that are added for regular tax purposes may be subtracted,” said CCH Principal Federal Tax Analyst Mark Luscombe, JD, LLM, CPA.
Doing Taxes Twice
For taxpayers, it means doing your taxes twice: You figure your regular federal tax, then calculate the AMT and pay whichever is greater. Many items can trigger an AMT liability – and change character when you leave the “normal” 1040 world and enter the world of the alternative minimum tax.
For example, the standard deduction and personal exemptions disappear. The itemized deduction for state taxes isn’t subtracted from income in figuring AMT, so residents of high-tax states – such as New York or California – are more likely to find themselves subject to the tax.
“Miscellaneous” itemized deductions aren’t allowed in figuring the AMT, either. This can affect taxpayers with large amounts of unreimbursed business expenses.
Special rules apply to medical expenses, home mortgage interest and investment interest deductions in calculating the AMT. For example, an itemized deduction for the interest on a mortgage that pays for your home or for home improvements is deducted for both regular tax purposes and the AMT, but if you borrowed against your home to buy something else or pay down your credit card balance, the interest is not deductible on the AMT form.
Stock Options Can Trigger AMT
During the stock market bubble years, the AMT brought extra anguish for those who saw their dot-com stock option fortunes disappear. When a company awards incentive stock options to employees, the recipients have to treat the value of the stock as income for AMT purposes as of the date they exercise the option. If the stock plunges in value before the holder can actually sell it and realize the hypothetical windfall, that’s too bad – the AMT bill still has to be paid.
“There undoubtedly have been people who escaped from the market owning just their home, only to find out that they had to sell it to pay the tax bill on ‘income’ they never actually saw,” Luscombe said.
No single factor may be decisive. As they approach higher income levels, taxpayers must discover for themselves if the AMT applies. A worksheet in the instructions for Form 1040, and its electronic equivalent, the “AMT Assistant” on the IRS web site (IRS.gov), tells taxpayers whether they might be subject to the alternative minimum tax.
Indexing, Nonindexing Increase AMT Exposure
The AMT has its own exemption amounts and tax brackets, but unlike their counterparts in the regular tax rules, numbers associated with the AMT have not been indexed for inflation. In fact, the indexing of various items for the purpose of regular tax – such as tax brackets, the standard deduction and personal exemptions – has a downright perverse effect on AMT liability, according to Luscombe.
“Indexing means that at any given level of income – say, $90,000 – you’ll owe less regular tax next year than you did this year,” Luscombe said. “But since AMT computations generally don’t use indexed figures, the AMT on that same level of income would stay the same. This means that the excess of your regular tax over AMT – the cushion that protects you from having to figure and pay the AMT – gets less and less at any given level of income, until you could find that you owe the AMT.”
The series of tax reductions that started in 2001 actually expose more people to the AMT, precisely because they lower regular taxes.
To delay the date when the AMT might start to eat away at the tax cuts for many people, Congress temporarily increased the exemption amount used in figuring the AMT beginning in 2001, then boosted the exemption again for the 2003 and 2004 tax years, then extended the relief for the 2005 tax year.
In 2006, 2007 and 2008, taxpayers were in the dark for most of the year about just what the AMT exemption would be before Congress upped the exemption, each time for one year only. In 2009, congressional action on the AMT came early, as part of the American Recovery and Reinvestment Act. The 2009 AMT exemption amounts are $70,950 for joint filers and surviving spouses and $46,700 for singles and heads of households.
But as things stand today, the exemptions for 2010 have fallen back to the levels of 2000: $33,750 for single taxpayers; $45,000 for joint filers and surviving spouses; and $22,500 for married taxpayers filing separately.
Over the same stretch of time, Congress has repeatedly allowed taxpayers to offset their AMT liability with a number of personal tax credits, but, once again, this “relief” has largely been enacted on a temporary basis and under current law, for 2010 many credits will be allowed only to the extent that they do not reduce your regular tax below your alternative tax.
Numbers Tell the Story
For the last several years, the temporary fixes have indeed kept the AMT at bay. But if the AMT exemption amounts go back to their pre-tax cut levels, returns with an AMT liability could be soaring up to 30 million in 2010.
The Joint Committee on Taxation forecast that in 2011, the number affected by the AMT will be roughly cut in half – but only because the tax cuts that began in 2001 are scheduled to come to an end. If those provisions live on beyond their current expiration date, the Congressional Research Service estimates that 41 million taxpayers – 37 percent of all the returns filed – will be affected by the AMT in 2012.
Abolish the AMT?
One obvious way to end the perceived inequities of the AMT would be to eliminate it once and for all. But the 2009 AMT exemption is estimated to cost the Treasury nearly $70 billion for a single tax year of AMT “relief.”
“If there were no AMT, budget deficits in future years would be larger than they’re currently projected to be and would extend further into the future,” Luscombe said.
President Barack Obama has proposed indexing the AMT for inflation.
“That may happen this year as part of a comprehensive package to make some of the 2001 tax cuts permanent, but it is still costly, and we may be in for another short-term fix instead,” Luscombe observed.
About CCH, a Wolters Kluwer business
CCH, a Wolters Kluwer business (CCHGroup.com) is a leading provider of tax, accounting and audit information, software and services. It has served tax, accounting and business professionals since 1913. CCH is based in Riverwoods, Ill. Wolters Kluwer is a leading global information services and publishing company. Wolters Kluwer is headquartered in Alphen aan den Rijn, the Netherlands (www.wolterskluwer.com).
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