The recently enacted 2012 American Taxpayer Relief Act signed by President Obama January 2, 2013 is a sweeping tax package. It includes, among many other things, “permanent” relief from the alternative minimum tax (“AMT”) for individual taxpayers. Earlier temporary measures to deal with the unintended creep of the AMT’s reach had expired at the end of 2011, meaning that millions of additional taxpayers would have faced paying the tax on their 2012 returns without the new relief.
Overview of the AMT. The AMT is a parallel tax system which does not permit certain deductions permissible under the regular tax system, such as property taxes. If you are subject to the AMT, you must calculate your tax liability under the regular federal tax system and under the AMT system taking into account certain “preferences” and “adjustments.” If your liability is found to be greater under the AMT system, that’s what you owe the federal government. Originally enacted to make sure that wealthy Americans did not escape paying taxes, the AMT has started to apply to more middle-income taxpayers, due in part to the fact that the AMT parameters were not indexed for inflation.
In recent years, Congress provided a measure of relief from the AMT by raising the AMT “exemption amounts”. These allowances reduced the amount of alternative minimum taxable income (“AMTI”), which in turn reduced or eliminated AMT liability. However, these exemption amounts are phased out when your AMTI exceeds specified amounts. For 2011, you had an AMT exemption amount of $74,450 if you were married filing jointly or a surviving spouse; $48,450 if you filed single; and $37,225 if you were married filing separately.
However, for 2012, those amounts were scheduled to fall back to the amounts that applied in 2000: $45,000, $33,750, and $22,500, respectively. This would have brought millions of additional middle-income Americans under the AMT system, resulting in higher federal tax bills, along with higher tax preparation fees associated with filling out and filing the complicated AMT tax form.
New law provides permanent fix. To prevent the unintended result of having millions of middle-income taxpayers fall prey to the AMT, Congress has once again applied a “patch” to the problem by extending the 2011 exemption amounts, increased slightly, but this time the patch is intended as a permanent fix. Under the new law, for tax years beginning in 2012, the AMT exemption amounts have been increased to $78,750 if you are married or are a surviving spouse, $50,600 if you are unmarried and not a surviving spouse, and $39,375 if you are a married individual filing a separate return. Most importantly, these amounts will be indexed for inflation after 2012, meaning that the annual “patches” will no longer be needed.
Personal credits may be used to offset AMT. Another provision in the new law provides AMT relief if you claim personal tax credits. The tax liability limitation rules used to provide that certain nonrefundable personal credits (including the dependent care credit and the elderly and disabled credit) were allowed only to the extent that your regular income tax liability was in excess of the tentative minimum tax, which had the effect of disallowing these credits against the AMT. Temporary provisions had been enacted which permitted these credits to offset your entire regular and AMT liability through the end of 2011. The new law extends this provision permanently, so that the credits are allowed to offset both your regular and your AMT tax liability.
Although there was much in the law that was questionable as “relief”, the AMT provisions truly are a relief to taxpayers.
By: Matthew M. Wallace, CPA, JD
Published edited March-April, 2013 in Savvy magazine as: Alternative minimum tax is a relief