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.
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.
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.