2012 CCH Whole Ball of Tax
AMT Patch Expires, But Look for a Comeback, Says CCH
Will Congress Approve Another Temporary Patch or Permanent Fix?
(RIVERWOODS, ILL., January 2012) – With the year-end deadline passing without an extension of higher alternative minimum tax (AMT) income exemption amounts, more moderate-income taxpayers will be impacted in the future – unless Congress retroactively reinstates the AMT patch, enacted as part of the 2010 Tax Relief Act. CCH, a Wolters Kluwer business and a leading provider of tax, accounting and audit information, software and services (CCHGroup.com), takes an in-depth look at the AMT and how it may affect tax returns.
Enhanced AMT exemption amounts expired at the end of 2011, but are expected to be reinstated retroactively by Congress in 2012. The AMT exemption amounts for 2011 are $48,450 for single individuals and $74,450 for married couples filing a joint return and surviving spouses.
However, if the AMT is not adjusted with a retroactive patch, the AMT exemption amounts would fall to the previous levels of $33,750 for single individuals and $45,000 for married couples filing a joint tax return – affecting more taxpayers.
“The top AMT tax bracket is 28 percent while the top regular tax bracket is 35 percent. So wealthier people tend to be less often subject to the AMT than other taxpayers, even when they are able to claim more deductions,” said CCH Principal Federal Tax Analyst Mark Luscombe, JD, LLM, CPA. “In fact, taxpayers most likely to be caught by the AMT are those earning $200,000 to $500,000.”
What Is the AMT?
The AMT is an alternate way of figuring income tax with its own tax rates and its own set of rules, including those limiting credits and deductions traditionally available under the rest of the “regular” tax code.
Generally, taxpayers may be subject to the AMT if their taxable income for regular tax purposes plus any adjustments and tax preference items results in an amount higher than the AMT exemption amount. If the AMT applies, they must separately figure a second tax by eliminating many deductions and credits. The taxpayer then must pay whichever is higher – the regular tax or the AMT.
Why Is There an AMT?
The original idea of the AMT when enacted in 1969 was to make certain that wealthy taxpayers were not using tax loopholes or taking excessive tax breaks. However, the AMT has changed little in 43 years. Because the AMT was never indexed for inflation, and for other reasons, the AMT today encroaches on many moderate-income taxpayers, especially two-income married couples.
It’s a good idea to consult a tax professional to explore whether certain deductions will or won’t trigger the AMT.
How It Works
Calculating whether they are subject to the AMT requires taxpayers to figure out their regular federal tax, then calculate the AMT and pay whichever is greater. Many items can trigger an AMT liability and some tax breaks allowed when calculating regular taxes change or disappear when applied to AMT.
Items disappearing include the standard deduction and personal exemptions. Additionally, many itemized deductions, which often favor higher income individuals, are not allowed in calculating the AMT. For example, the itemized deduction for state taxes can’t be subtracted from income in figuring AMT. As a result, residents of high-tax states – such as New York or California – are more likely to find themselves subject to the tax. Also, 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 for certain other itemized deductions, including 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 the taxpayer’s home or for home improvements is deducted for both regular tax purposes and the AMT, but if the taxpayer borrowed against her home to buy something else or pay down her credit card balance, the interest is not deductible on the AMT form.
For an overview of state income tax rates see Release 18 and for detail on itemized deductions see Release 25.
No single item alone may trigger the AMT. However, among those contributing to it could be:
- Income above $100,000;
- Many itemized deductions;
- Exercising incentive stock options; and
- A high number of personal exemptions.
“People need to look at their own situation,” Luscombe cautioned. “A taxpayer with a large family and high medical costs earning $75,000 may find he is subject to the AMT as a result of having a large number of itemized deductions and a large number of personal exemptions.”
A worksheet in the instructions for Form 1040, and its electronic equivalent, the “AMT Assistant” on the IRS website (IRS.gov), tells taxpayers whether they might be subject to the alternative minimum tax.
How the Type of Taxpayer Affected By the AMT Has Changed
Regular tax rules index various items, such as tax brackets, the standard deduction and personal exemptions. The AMT does not. Rather, taxpayers pay a tax rate of 26 percent on the first $175,000 ($87,500 for married couples filing separately) and 28 percent on the excess of this – and these amounts are not indexed for inflation.
As a result, the regular tax on $100,000 would likely reduce over the years as the regular tax brackets adjusted. However, the AMT on $100,000 would stay the same, even though its value diminishes with inflation.
Additionally, the series of tax reductions that started in 2001 actually expose more people to the AMT, precisely because they lower regular taxes. People have been able to reduce their taxable income under regular taxes, which for some has exposed them to the AMT. As a result, lowering taxes without addressing the AMT can actually result in higher taxes for a greater segment of middle-income taxpayers.
Will the AMT Be Abolished?
While there appears to be consensus from Democrats and Republicans that the AMT should be abolished in principal, the reality is that, even with the AMT patches to occasionally increase the exemptions, it still raises sorely needed revenue .
“For example, the two-year extension through 2011 of the AMT patch cost the government an estimated $136.7 billion in lost revenue.”
However, abolishing the AMT along with reducing tax rates and cutting “backdoor” tax code spending is one part of the six-part plan proposed by the bipartisan National Commission on Fiscal Responsibility and Reform to promote economic growth.
“Getting rid of the AMT will likely only come as part of a larger overhaul of the tax code,” said Luscombe. “Otherwise, the budget deficit would grow even larger and extend even further into the future.”
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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