Are You At Risk for an AMT Nightmare?
If you live in a state with a high income tax, property tax, or city tax (or all of the above) or recently got married and you and your spouse are both income earners, you may be in for a rude awakening when you fire up your tax software in January 2013. That’s because, without congressional action, the Alternative Minimum Tax, or AMT, is set to cost 28 million Americans an average of $2,000 this year in addition to what they were expecting to pay based on 2011 tax law.
The AMT was passed in 1969 as a reactionary measure to a congressional report that showed 155 wealthy individuals did not pay any income taxes. The AMT was supposed to work by limiting the deductions of high-income earners based on 1969 standards. Unfortunately for an estimated 28 million Americans subject to the AMT, the original measure did not allow for inflation adjusted income standards for computation of taxes owed under AMT.
To fix this oversight, congress has imposed what has been known as the AMT “patch” on a yearly basis to offset the AMT cost to middle class families. This patch takes the form of an exemption of income as part of AMT calculations. In 2010, as part of the Tax Relief Act, the exemption was $48,450 for single and head of household filers, $37,225 for married people filing separately, and $74,450 for married couples filing jointly.
However, for tax year 2012 these exemptions are scheduled to be reduced to $33,750 for single and head of household filers, $22,500 for married couples filing separately, and $45,000 for married couples filing jointly. This means that more income will be subject to the AMT tax rate for 2012 than 2011.
If you live in an area with high local and state taxes these exemption changes could make you particularly vulnerable to AMT adjusted tax liabilities. There are ways to decrease your tax liability (401k contributions and charitable contributions are deductible from AGI for AMT computational purposes) and if you think you may be subject to AMT, check with your accountant or professional financial advisor.
In any case, it may be safe to spend a little more time sniffing out discounts this holiday season. If there is no AMT "patch" for 2012, you could end up needing that savings to send a check to the IRS by April 15.