What does AMT mean to you?
The Alternative Minimum Tax parallels the regular income tax: taxpayers whose AMT liability exceeds their regular tax liability pay the difference as AMT.
The AMT replaces personal exemptions and some deductions (most notably the standard deduction and the deduction of state and local taxes) with an AMT exemption and applies two tax rates-26% on the first $175000 and 28% on any excess-to the resulting AMT taxable income.
Unlike the regular income tax the AMT is not indexed for inflation. Thus ever more taxpayers owe AMT as that liability rises relative to regular tax liability.
So what changes will affect you if there is no patch put in place?
Every year congress enacts a patch to AMT to keep it from reaching lower income tax payers. The most recent AMT patch and the exemptions amounts of $74450 for Joint and $48450 for single taxpayers expired at the end of 2012. If nothing is enacted then the new exemption amounts for 2012 will be $45000 for joint files and $33750 for single taxpayers. This means nearly 30 million additional taxpayers will become subject to AMT in 2012. This could also cause problems for the IRS because if there is no patch put in place then the IRS will have to make system changes which will result in them not being able to take in tax returns until late March of 2013. This will result in two things
- Anyone expecting a tax refund in 2013 will have to wait considerably longer.
- Quite a few tax payers will have to pay an additional tax one which they were totally unaware of.
Moreover if congress were to act later into next year to enact this patch the IRS would have wasted quite a bit of money to adjust for the missing patch with the assumption that it wasn’t coming costing more taxpayer dollars. This is a serious situation that we are in and as of writing this blog we have no patch in place.
How much will I pay?
This is a tough question to answer. Having a CPA on your side to help you look at it is always advised because there are a lot of factors that go into the AMT calculation. Here are a few notes to show you who is affected the most:
- In 2012 barring congressional action about 94% of those with incomes between $200000 and $500000 will pay the tax as will roughly 80% of those with income between $500000 and $1 million and between $100000 and $200000. Taxpayers at the very top of the income scale are less likely to pay AMT than those just below them because they pay the top regular tax rate which exceeds the top AMT rate.
- Families with more children are more likely to owe AMT. Under current law 44% of taxpayers with three or more children will owe AMT in 2012 compared with 17% of childless taxpayers because the regular tax system allows exemptions for dependents that the AMT does not.
- Residents of high-tax states are more likely to pay AMT than those in low-tax states. Over a quarter of residents of high-tax states will owe AMT in 2012 compared with one-fifth of residents of low-tax states because the AMT does not allow a deduction for state and local taxes paid.
- The top five states in terms of percentage of returns on the AMT are New Jersey New York Connecticut the District of Columbia and California with rates ranging from 8.7 to 6.5% in 2008. In contrast less than 2% of taxpayers in Alaska Nevada South Dakota Tennessee West Virginia or Wyoming paid the alternative levy.
What can you do?
There are a few things you can do to prepare for this!
- Contact your Representative in Washington and tell them to pass the AMT Patch.
- Contact your CPA at Lindemeyer CPA for advice on how much your tax could be and how to prepare for it.