So what is the Alternative Minimum Tax (AMT)?
If you don’t know what it is then you better pay attention because with Congress taking no action so far in 2012 many more Americans will find themselves victims of this tax. The AMT was created in 1969 as a tax against the rich and super wealthy after an uprising of populist anger over the fact that 150 wealthy families were able to eliminate their taxable income using deductions – it’s important to note the top tax bracket back then was a whopping 77%! With most Americans forced to pay the vast majority of their income to the government it is understandable that there would be an emotional reaction for people who were able to work their way through the system and significantly lower their taxes. The response to this became the Alternative Minimum Tax.
The argument over whether or not to sock the rich in taxes is not what this post is about so I’ll stay away from that, for now. What is important is that when the new tax was passed it was never indexed to inflation – meaning that every year more and more people are sucked into the tax. Typically Congress acts to partially adjust the level of the tax to keep the number of middle class families eligible for the tax to a minimum. As of this writing Congress has not done anything to fix the Alternative Minimum Tax. The Congressional Budget Office (CBO) says;
“if nothing is changed, one in five taxpayers will have AMT liability and nearly every married taxpayer with income between $100,000 and $500,000 will owe the alternative tax. Rather than affecting only high-income taxpayers who would otherwise pay no tax, the AMT has extended its reach to many upper-middle-income households”
Wow, that means lots of people who have never had to pay this tax will now be hit hard! Also the Tax Policy Center estimates that for tax year 2012 the average cost per tax payer will be $4,643. Plus…
“84% of all the Alternative Minimum Tax payments will be made by families making less than $200,000 per year” Sounds like the middle class to me! Also check out that those making more than $500,000 are only 2% of the AMT payers.
So there goes the theory that this tax is all about getting those evil mean rich people!
What you need to know:
- On average families will see their taxes rise by about $4,634
- 2012 AMT Exemption Levels – $45,000 for married filing jointly, $33,750 for singles and heads of household, and $22,500 for married couples filing separately
- Tax Rates: 26% on the first $175,000 of income; 28% on any income over $175,000
- Individuals are not allowed deductions for personal exemptions or for the standard deductions.
- No deduction is allowed for state, local or foreign taxes
- Typically no deduction is allowed for most miscellaneous itemized deductions
- Medical expenses are deductible for AMT only to the extent they exceed 10% of adjusted gross income (as compared to 7.5% for regular tax)
- Medical expenses are deductible for AMT only to the extent they exceed 10% of adjusted gross income (as compared to 7.5% for regular tax)
- Interest for personal and second residences is still allowed
- Investment interest is only allowed to the extent of net investment income
- Any stocks received as employee options or under employee stock option plans must be counted as income even if you didn’t sell the shares
I hope I have opened your eyes to the startling reality that you could have a significantly higher tax bill come next April. Hopefully Congress will get its act together and do something about the AMT but frankly I don’t trust them. I guess we’ll have to wait and see. In the meantime though you need to start planning and preparing in case they don’t and you find yourself either having to pay a few thousand dollars or losing all of your refund come next year. Knowledge is power so be warned and plan accordingly.
Have you had to pay the AMT tax before? Do you think you will have to pay it this year? Do you think Congress will fix the AMT or leave us high and dry?
Resources:
Congressional Budget Office Report on the Alternative Minimum Tax
About Peter Serrano