AMT credits

The Fiscal Cliff Avoided: Alternative Minimum Tax Payers Finally Get a Permanent Fix for the AMT “Patch”

Saturday, January 5th, 2013 | Print This Post Print This Post | Email This Post Email This Post

A most amazing thing has just happened.  On the brink of 30 million additional taxpayers getting sucked into the AMT vortex for the first time, not to mention the 4 million already there each getting ready to pay thousands more in taxes, just hours after the deadline actually had passed Congress found a way to enact a permanent fix for the AMT patch.  And with direction from a vacation home in Hawaii to make us of his autopen, on January 2 the President signed the Taxpayer Relief Act of 2012 into law.  No longer do AMT payers have to fear the dropping of the ball in Times Square, with the negative tax implications associated with the turning of a new year.  Instead, with the certainty that this new law brings, time will be better spent planning to minimize the AMT burden that folks already have.

 

The Patch

 

The annual Patch, as it has been called, is accomplished by indexing the AMT exemption amount for the annual change in the Consumer Price Index, as is already being done with many other tax law provisions.  Without this fix, the 2012 exemption for a married couple would have been $45,000; with the fix it will be $78,750 for 2012.  This difference would have meant nearly 30 million additional folks falling into the AMT.  The 2013 exemption indexing has not yet been computed by the IRS, but it is expected to be approximately $80,800.

 

The cost of the permanent fix

 

The Congressional Joint Committee on Taxation has calculated the ten-year cost of the permanent AMT patch to be a whopping 1.8 trillion dollars.  This is nearly one-half of the total cost of the changes made by the new law.  Interestingly, Congress exempted itself form the standard requirement that tax breaks , as well as any spending measure for that matter, be offset by revenue raisers.  But that did not have to be done here.

 

Other changes to the tax law affecting AMT payers

 

In addition to the Patch, numerous other provisions in the new law will have a direct impact on AMT payers.  One of these is the subject of tax credits.  A credit is a dollar-for-dollar reduction in your tax liability – i.e., a $100 tax credit will reduce your taxes by $100.  A $100 deduction, on the other hand, will save you taxes to the extent of your tax bracket.  For example, if an expense is AMT-deductible, and if you are in the 28% AMT bracket, a $100 deduction will reduce your taxes by $28.

 

Prior to these new law changes, many credits were allowable only against the Regular Tax and not against the Alternative Minimum Tax.  Examples of these are the child care credit and the residential energy tax credit.  Now, however, under the new law these and many other credits may be taken even by folks in the AMT.  This is a real benefit.

 

Conclusion

 

What a great relief the new law brings.  That being said, however, there are 4 million folks out there still paying the Alternative Minimum Tax, and there are lots of planning opportunities in existence to reduce the amount each person actually pays.  With the start of a new year, it behooves every AMT payer to plan to pay less AMT in 2013 than he or she paid in 2012.

 

Posted in AMT credits, AMT Exemption, AMT Planning in General, Calculation of the AMT, Legislation/tax law changes | No Comments »

Year-End Tax Extenders – Where’s The Patch?

Sunday, December 11th, 2011 | Print This Post Print This Post | Email This Post Email This Post

Every year at about this time Congress starts thinking about what tax laws will expire on December 31, and what it really needs to be doing about these.  Of the 65 various tax provisions that will expire, one of the big ones is the annual “Patch” for the Alternative Minimum Tax.  Without the Patch, nearly 30 million new taxpayers will wake up on New Year’s Day with a lot more than the usual hangover, and the 4 million already in the AMT had better get their checkbooks out for the additional taxes they’ll owe.  In addition to this one item, however, there are several other extenders that also can have a direct impact on AMT payers.

 

What is The Patch and what does it mean to AMT payers?

 

The Patch is the annual adjustment to the exemption amount allowed in computing each individual’s AMT.  Using the married filing jointly example, the exemption for 2011 is $74,450.  If the Patch is not enacted for 2012, this amount would drop to $45,000, meaning that the couple’s taxable income subject to the AMT would increase by $29,450 – the difference between these two numbers.  This could mean an additional $8,000 in Alternative Minimum Tax due in 2012!

 

Personal tax credits allowed against the AMT

 

The tax law is replete with what are known as “tax credits.”  A tax credit is distinguished from a tax deduction in that it is a direct reduction of your tax liability instead of a reduction of your taxable income in computing your tax liability.  For example, if you are in the 26% AMT bracket a $100 tax deduction would save you $26 in taxes.  Compare this with a $100 tax credit, which would reduce your taxes by the full $100.  One example of a credit that a taxpayer might be eligible is that allowed for making certain energy-efficient improvements to one’s personal residence.

 

A significant number of tax credits are allowed only to individuals paying the Regular Tax, denying those stuck in the AMT a similar benefit.  On occasion, however, Congress has seen fit to extend these benefits to AMT payers, but only for one year at a time.  A number of these types of credits are on the tax extenders list.

 

State and local sales tax deduction

 

For individuals living in a state with no personal income tax, Congress has on occasion allowed these folks a deduction for state and local sales tax paid.  This deduction currently is on the list of extenders that are needed in 2012.  Just like other state and local taxes – property taxes and income taxes, for example – a deduction for state sales tax is allowed for Regular Tax purposes but not for Alternative Minimum Tax payers.  Thus, for individuals in these states the extension – or not – of this as an allowable deduction can have a direct impact on their AMT paid.

 

Small business stock

 

Gains from the sale of qualifying “small business stock” may not need to be fully reported for purposes of the Regular Tax.  For the AMT, however, a portion of the gain needs to be added back into taxable income.  Some of the special rules that apply to small business stock are on one-year extenders, so an AMT payer with this item will be affected by these extenders.

 

Percentage depletion

 

For investors and operators in the oil and gas business, the use of percentage depletion can trigger the AMT.  Percentage depletion computations are complex, with several limitations imposed in the various steps of the calculations.  The extension of one of these items, knows as the 100%-of-net-income limitation, could have a direct impact on affected AMT payers.

 

Conclusion

 

Politics being politics, one never knows with any certainty what Congress is going to do or when they are going to do it.  Historically, however, these extenders – including The Patch – have been enacted, although more often than not well past the deadline but on a retroactive basis.  Readers are advised to keep an eye on developments on this important topic.

Posted in AMT credits, AMT Exemption, AMT Items, Credits Allowable, Legislation/tax law changes, State Income & Other Taxes, The "patch" | No Comments »

Who Can Benefit from the Alternative Minimum Tax Credit?

Tuesday, August 23rd, 2011 | Print This Post Print This Post | Email This Post Email This Post

With few exceptions, when the Alternative Minimum Tax is paid it is money out the door – gone forever.  No surprise here since this is the way taxes work.  What is a surprise to many folks, however, is that a portion of the AMT paid in one year may instead simply be a prepayment of taxes – referred to as a “credit” – that may be available as a refund in a future year.  Understanding which AMT items generate this future credit and which don’t can result in additional tax savings.

 

AMT items that are “exclusion items”

 

There are many different kinds of deductions allowed in computing taxable income.  For the AMT, a distinction is made between those that are “exclusion” items and those that are not.  Exclusion items are those that are either deductible or not in the year paid – they have no impact on future years.  Common examples of these are the various itemized deductions that are allowed for the Regular Tax but not for the Alternative Minimum Tax.

 

AMT items that are not exclusion items

 

A distinction is made between exclusion items, and those AMT items that affect only the timing of when a deduction is taken.  The most common example of this is Depreciation.  A deduction for depreciation of business or certain investment assets is allowed both for the Regular Tax as well as the Alternative Minimum Tax, but if a taxpayer chooses an accelerated form of depreciation for Regular Tax purposes he is getting a disproportionately larger deduction in the early years of the asset’s life.  The AMT says “no” to this – the acceleration needs to be slowed down a little.

 

AMT items that are not exclusion items – specific examples

 

Below is a list of the Alternative Minimum Tax items that are not exclusion items, and, thus, to the extent a taxpayer is paying the AMT as a result of any of these items, that portion of the AMT is eligible to be taken as a credit against future taxes owed by the individual (line references shown are to the 2010 Form 6251):

 

Investment interest expense – line 8

AMT net operating loss deduction – line 11

Incentive stock options – line 14

Estates and trusts – line 15

Electing large partnerships – line 16

Disposition of property – line 17

Depreciation – line 18

Passive activities – line 19

Loss limitations – line 20

Circulation costs – line 21

Long-term contracts – line 22

Mining costs – line 23

R & D costs – line 24

Certain installment sales – line 25

Intangible drilling costs – line 26

 

Form used to report the credit

 

IRS Form 8801 is the tax form used to calculate the amount of credit that may be taken in the current year for prior years’ AMT paid.  This form pulls data from the prior year’s Form 6251, and uses it to compute how much of the AMT paid in the prior year is attributable to exclusion items.  The difference, if any, between the total AMT paid in the prior year and this recomputed amount is the amount of AMT available as a credit in the current year.

 

Credit is taken against the Regular Tax

 

The AMT credit carryover may be taken as a reduction of the current year’s Regular Tax.  Thus, if the taxpayer is in the AMT again, the credit can’t yet be used, but it will accumulate and be carried to a future year when the Regular Tax is paid.  Under a special rule, however, if after three years the credit carryover hasn’t been used, 50% of it may be used against the taxpayer’s then-current year AMT.

 

Case study – Sarah Palin’s tax return

 

During the 2008 Presidential campaign, as is common practice the candidates for office released copies of their tax returns.  The tax return filed by Sarah Palin and her husband for 2006 included a Form 8801, which was used to test whether there was an AMT credit carryover from prior years.  While the prior years’ returns were not released, it was interesting to note that Todd Palin was self-employed in several businesses that utilized vehicles and equipment that were depreciable for tax purposes.  Because these assets were depreciated using the most accelerated method possible, the AMT had been paid by them in prior years.

 

Conclusion

 

Alternative Minimum Tax payers are doing a real disservice to themselves if they fail to test for the AMT credit carryover each year.  Depending on the types of AMT items a taxpayer has, and their relative sizes, taxpayers may find a pleasant surprise in the form of a refund of prior year AMT paid!

 

Posted in AMT credits, Credit Carryover | 1 Comment »

Index the Individual Alternative Minimum Tax Amounts for Inflation

Monday, July 4th, 2011 | Print This Post Print This Post | Email This Post Email This Post

More from the Joint Committee on Taxation – just-released report “Description of Revenue Provisions Contained in the President’s Fiscal Year 2012 Budget Proposal.” This massive 647-page report contains a proposal for a permanent Alternative Minimum Tax “patch,” as set forth below.

 

Present Law

 

Present law imposes an alternative minimum tax (“AMT”) on individuals. The AMT is

the amount by which the tentative minimum tax exceeds the regular income tax. An individual’s tentative minimum tax is the sum of (1) 26 percent of the first $175,000 ($87,500 in the case of a married individual filing a separate return) of the excess of alternative minimum taxable income (“AMTI”) over the AMT exemption amount and (2) 28 percent of the remaining excess. The maximum tax rates on net capital gain and dividends used in computing the regular tax are used in computing the tentative minimum tax. AMTI is the individual’s taxable income adjusted to take account of specified preferences and adjustments.

 

The exemption amounts are: (1) $74,450 ($45,000 in taxable years beginning after 2011)

in the case of married individuals filing a joint return and surviving spouses; (2) $48,450

($33,750 in taxable years beginning after 2011) in the case of other unmarried individuals; (3) $37,225 ($22,500 in taxable years beginning after 2011) in the case of married individuals filing separate returns; and (4) $22,500 in the case of an estate or trust. The exemption amounts are phased out by an amount equal to 25 percent of the amount by which the individual’s AMTI exceeds (1) $150,000 in the case of married individuals filing a joint return and surviving spouses, (2) $112,500 in the case of other unmarried individuals, and (3) $75,000 in the case of married individuals filing separate returns or an estate or a trust. These amounts are not indexed for inflation.

 

Present law provides for certain nonrefundable personal tax credits. These credit include

the dependent care credit, the credit for the elderly and disabled, the adoption credit, the child credit, the credit for interest on certain home mortgages, the Hope Scholarship and Lifetime Learning credits, the credit for savers, the credit for certain nonbusiness energy property, the credit for residential energy efficient property, the credit for certain plug-in electric vehicles, the credit for alternative motor vehicles, the credit for new qualified plug-in electric drive motor vehicles, and the D.C. first-time homebuyer credit.

 

For taxable years beginning before 2012, the nonrefundable personal credits are allowed

to the extent of the full amount of the individual’s regular tax and alternative minimum tax.  For taxable years beginning after 2011, the nonrefundable personal credits (other than the adoption credit, the child credit, the Hope Scholarship credit (for taxable years beginning after 2012), the credit for savers, the credit for residential energy efficient property, the credit for certain plug-in electric vehicles, the credit for alternative motor vehicles, and the credit for new qualified plug-in electric drive motor vehicles) are allowed only to the extent that the individual’s regular income tax liability exceeds the individual’s tentative minimum tax, determined without regard to the minimum tax foreign tax credit. The adoption credit, the child credit, the Hope Scholarship credit (for taxable years beginning before 2013), the credit for savers, the credit for residential energy efficient property, the credit certain plug-in electric vehicles, the credit for alternative motor vehicles, and the credit for new qualified plug-in electric drive motor vehicles are allowed to the full extent of the individual’s regular tax and alternative minimum tax.1640

 

Description of Proposal

The proposal provides that the individual AMT exemption amounts, including the

thresholds for the phaseout of the exemption amounts, are indexed for inflation from the levels in effect for 2011. The proposal indexes the threshold amounts for the beginning of the 28-percent bracket.  The proposal allows an individual to offset the entire regular tax liability and alternative minimum tax liability by the nonrefundable personal credits.

 

Effective date.–The proposal is effective for taxable years beginning after 2011.

Analysis

 

Allowing the nonrefundable personal credits to offset the regular tax and alternative

minimum tax, and increasing the exemption amounts, will substantially reduce the number of taxpayers affected by the AMT. In addition to the reduction in tax liability as a result of this change, there will be significant simplification benefits. Substantially fewer taxpayers will need to complete the alternative minimum tax form (Form 6251), and the forms and worksheets relating to the various credits can be simplified.

 

By permanently establishing the AMT exemption levels and ability to take nonrefundable

credits against the AMT, the proposal provides greater certainty for taxpayers as to their tax obligation resulting from the AMT, in comparison to the practice over the past years of annually adjusting the exemption levels to prevent their reversion to the levels in effect prior to EGTRRA.  Additionally, by indexing the AMT system for inflation, as is done in the regular tax system, the proposal prevents tax increases in real terms for the portion of one’s income growth that merely accounts for inflationary growth. By doing so, the proposal substantially slows the rate of growth in the number of taxpayers subject to the AMT over time.

 

A number of analysts argue that the proposal does not go far enough, advocating instead

the abolition of the AMT. Their argument rests on the observation that the AMT system has outlived its original purpose of requiring taxpayers engaged in substantial sheltering of income to pay at least some minimum tax. Instead, taxpayers today are mainly ensnared by the AMT as a result of their income level, payment of state and local taxes, and presence of dependents. Such analysts argue that requiring such taxpayers to calculate their liability two ways is needlessly complex and serves no discernible policy objective that the regular tax alone couldn’t provide.

 

1640 The rule applicable to the child credit after 2012 is subject to the EGTRRA sunset. The adoption credit

is refundable in 2011 and beginning in 2012 is nonrefundable and treated in the same manner as the child credit.

 

Posted in AMT credits, AMT Exemption, Legislation/tax law changes, The "patch" | No Comments »

Joint Committee on Taxation Explains the Recently-Passed AMT Patch

Thursday, February 3rd, 2011 | Print This Post Print This Post | Email This Post Email This Post

One of the functions of the staff of the Joint Committee on Taxation is to prepare non-technical explanations of tax law changes, both for Members of Congress as they deliberate on a bill as well as for tax advisers and others who want a better understanding of tax law changes.  Set forth below is the official staff explanation of the recently-enacted AMT patch.

TECHNICAL EXPLANATION OF THE REVENUE PROVISIONS CONTAINED IN THE “TAX RELIEF, UNEMPLOYMENT INSURANCE REAUTHORIZATION, AND JOB CREATION ACT OF 2010”

TITLE II − TEMPORARY EXTENSION OF INDIVIDUAL ALTERNATIVE MINIMUM TAX RELIEF

Extension of Alternative Minimum Tax Relief for Nonrefundable Personal Credits and Increased Alternative Minimum Tax Exemption Amount (secs. 201 and 202 of the bill and secs. 26 and 55 of the Code)

Present Law

Present law imposes an alternative minimum tax (“AMT”) on individuals.  The AMT is

the amount by which the tentative minimum tax exceeds the regular income tax.  An individual’s tentative minimum tax is the sum of (1) 26 percent of so much of the taxable excess as does not exceed $175,000 ($87,500 in the case of a married individual filing a separate return) and (2) 28 percent of the remaining taxable excess.  The taxable excess is so much of the alternative minimum taxable income (“AMTI”) as exceeds the exemption amount.  The maximum tax rates on net capital gain and dividends used in computing the regular tax are used in computing the tentative minimum tax.  AMTI is the individual’s taxable income adjusted to take account of specified preferences and adjustments.

The exemption amounts are: (1) $70,950 for taxable years beginning in 2009 and $45,000 in taxable years beginning after 2009 in the case of married individuals filing a joint return and surviving spouses; (2) $46,700 for taxable years beginning in 2009 and $33,750 in taxable years beginning after 2009 in the case of other unmarried individuals; (3) $35,475 for taxable years beginning in 2009 and $22,500 in taxable years beginning after 2009 in the case of married individuals filing separate returns; and (4) $22,500 in the case of an estate or trust.  The exemption amount is phased out by an amount equal to 25 percent of the amount by which the individual’s AMTI exceeds (1) $150,000 in the case of married individuals filing a joint return and surviving spouses, (2) $112,500 in the case of other unmarried individuals, and (3) $75,000 in the case of married individuals filing separate returns or an estate or a trust.  These amounts are not indexed for inflation.

Present law provides for certain nonrefundable personal tax credits (i.e., the dependent care credit, the credit for the elderly and disabled, the child credit, the credit for interest on certain home mortgages, the Hope Scholarship and Lifetime Learning credits, the credit for savers, the credit for certain nonbusiness energy property, the credit for residential energy efficient property, the credit for certain plug-in electric vehicles, the credit for alternative motor vehicles, the credit for new qualified plug-in electric drive motor vehicles, and the D.C. first-time homebuyer credit).

For taxable years beginning before 2010, the nonrefundable personal credits are allowed

to the extent of the full amount of the individual’s regular tax and alternative minimum tax.

For taxable years beginning after 2009, the nonrefundable personal credits (other than the

child credit, the credit for savers, the credit for residential energy efficient property, the credit for certain plug-in electric drive motor vehicles, the credit for alternative motor vehicles, and credit for new qualified plug-in electric drive motor vehicles) are allowed only to the extent that the individual’s regular income tax liability exceeds the individual’s tentative minimum tax, 38 determined without regard to the minimum tax foreign tax credit.  The remaining nonrefundable personal credits are allowed to the full extent of the individual’s regular tax and alternative minimum tax.30

Explanation of Provisions

The provision allows an individual to offset the entire regular tax liability and alternative

minimum tax liability by the nonrefundable personal credits for 2010 and 2011.  The provision provides that the individual AMT exemption amount for taxable years beginning in 2010 is (1) $72,450, in the case of married individuals filing a joint return and surviving spouses; (2) $47,450 in the case of other unmarried individuals; and (3) $36,225 in the case of married individuals filing separate returns.  The provision provides that the individual AMT exemption amount for taxable years beginning in 2011 is (1) $74,450, in the case of married individuals filing a joint return and surviving spouses; (2) $48,450 in the case of other unmarried individuals; and (3) $37,225 in the case of married individuals filing separate returns.

Effective Date

The provision is effective for taxable years beginning after 2009.

Posted in AMT credits, AMT Exemption, Calculation of the AMT, Legislation/tax law changes | 1 Comment »

Legislative History of the AMT as Summarized by the Joint Committee on Taxation

Wednesday, January 26th, 2011 | Print This Post Print This Post | Email This Post Email This Post

As a part of its preparation for the House Ways and Means Committee hearings on fundamental tax reform, the Joint Committee on Taxation prepared a summary history of the Alternative Minimum Tax.  Here is the Joint Committee’s report:

An add-on minimum tax was first enacted by the Tax Reform Act of 1969.  The add-on minimum tax was repealed by The Tax Equity and Fiscal Responsibility Act of 1982.  The add-on minimum tax, as originally enacted, generally was a tax at a 10-percent rate on the sum of the specified tax preferences in excess of the sum of $30,000 plus the taxpayer’s regular tax.

The 1982 Act enacted the first comprehensive individual AMT.  Under the 1982 Act, in computing AMTI, the deduction for state and local taxes, the deduction for personal exemptions, the standard deduction, and the deduction for interest on home equity loans were not allowed.  Incentive stock option gain was included in AMTI.  These remain the principal preferences and adjustments under present law.  The Tax Reform Act of 1986 largely retained the structure of the prior-law AMT, since 1986, several changes have been made to the computation of the individual AMT.  The principal changes are set forth below:

Adjustments and preferences – The principal changes made in the determination of AMTI were to repeal the preference for charitable contributions of appreciated property; repeal the preference for percentage depletion on oil and gas wells; substantially reduce the amount of the preference for intangible drilling expenses; and repeal the requirement that alternative depreciation lives be used in computing the deduction for ACRS depreciation.

Rates – The Omnibus Budget Reconciliation Act of 1990 increased the individual AMT tax rate from 21 percent to 24 and the rate was further increased by the Omnibus Budget

Reconciliation Act of 1993 to the 26- and 28-percent rate structure of present law (when the maximum regular tax rate was increased from 31 percent to 39.6 percent).

Exemption amounts – The Omnibus Budget Reconciliation Act of 1993 increased the

AMT exemption amounts to $45,000 ($33,750 for unmarried taxpayers).  The AMT exemption amounts were temporarily increased to $49,000 ($35,750 for unmarried individuals) for 2001 and 2002, to $58,000 ($40,250 for unmarried individuals) for 2003, 2004, and 2005, to $62,550 ($42,500 for unmarried individuals) for 2006, $66,250 ($44,350 for unmarried individuals) in 2007, $69,950 ($46,200 for unmarried individuals) in 2008, to $70,950 ($46,700 for unmarried individuals) in 2009, and $72,450 (($47,450 for unmarried individuals) for 2010, and $74,450 ($48,450 for unmarried individuals) in 2011.

Credits – For 1998 and subsequent years, the nonrefundable personal credits have been allowed on a temporary basis to offset the AMT.  The last extension, through 2011, was enacted by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.

Source: Present Law and Historical Overview of the Federal Tax System, JCX-1-11, January 18, 2011.

Posted in AMT credits, AMT Exemption, Calculation of the AMT, History of the AMT, Legislation/tax law changes | No Comments »