AMT Exemption

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 Planning – Accelerating or Deferring Income to Minimize Your Alternative Minimum Tax

Sunday, December 2nd, 2012 | Print This Post Print This Post | Email This Post Email This Post

At year-end many articles are written about accelerating or deferring deductions.  The sometimes-overlooked question of accelerating or deferring income deserves just as much attention, especially for those in the Alternative Minimum Tax.  This article will look at what needs to be considered in planning around income recognition, including a summary of the different types of income to which this planning can apply.

 

Comparing tax brackets

 

Tax brackets for the Alternative Minimum Tax are progressive, as are those of the Regular Tax.  For 2012 the Regular Tax has six brackets, ranging from 10% to 35%, while the AMT has just two – 26% and 28%.  For AMT payers, however, the stated brackets are directly affected by the AMT exemption phaseout.

 

For a married couple, the phaseout begins at $150,000 and doesn’t stop until their income exceeds $440,000.  Within this range, each incremental $100 of income will result in a loss of $25 of the AMT exemption.  The result is that a 28% Alternative Minimum Tax bracket is increased by a factor of 25%, resulting in an effective AMT tax bracket of 35%!

 

Knowing one’s effective tax bracket is the way to do proper AMT planning.  It can be a costly mistake to deliberately accelerating income, thinking one is in an Alternative Minimum Tax bracket lower than the Regular Tax bracket, only to find out this actually is not the case.  Many year-end tax planning articles routinely suggest that people in the AMT do exactly this, but without knowing what your effective AMT tax rate is it could instead turn out to be a costly mistake.

 

The types of income can be accelerated or deferred

 

-  Employee bonuses and stock options

 

Employers may allow employees the choice of taking their bonuses currently or deferring them.  Employees also may be granted stock options, and these can be exercised in December or in January.  For nonqualified stock options, taxable income will be recognized immediately on the date of exercise – both for the AMT as well as Regular Tax purposes.  For qualified options (commonly known as incentive stock options, or ISOs), there is no taxable income on the date of exercise for Regular Tax purposes, but there is for the Alternative Minimum Tax.

 

-  Business income

 

A cash-method business could pay outstanding bills in December to reduce income, or wait to pay them in January, and this directly affects the amount of income reported on the business owner’s tax return.  The business also could hold off from sending out certain bills out towards the end of the year, postponing income into the following year.

 

-  Investment income

 

Capital gains – an individual controls the timing of any sales of investments, so capital gains could be recognized this year or next.

 

Rental income – a landlord might ask that the rent that is due on January 1st be paid in this year or next.

 

Interest and dividends – an individual can shift between bonds and dividend-paying stocks to affect the amount of interest and dividend income received.

 

Conclusion

 

Knowing what tax bracket you are in is critical to tax planning.  An effective way to minimize the AMT is to look at the options available in terms of what income might be moved between 2012 and 2013, and then to figure out which of these choices will result in the lowest tax burden.  With year-end rapidly approaching, it’s definitely time to get out the calculator!

Posted in AMT Exemption, AMT Planning in General, Calculation of the AMT | No Comments »

The “Fiscal Cliff” – Bad News Coming for Millions of Alternative Minimum Tax Payers – Are You One of Them?

Saturday, October 27th, 2012 | Print This Post Print This Post | Email This Post Email This Post

The elections are around the corner, the year is rapidly drawing to a close, and Congress is on its fall “recess” without, once again, having done anything about the Alternative Minimum Tax “patch.”  The so-called “patch” is the adjustment that needs to be made to the AMT exemption amount to prevent 26 million new taxpayers from falling into the Alternative Minimum Trap this year, as well as to prevent each of the 4 million already stuck there from paying thousands more in AMT dollars.  Many taxes are going up significantly come January 1 – both income taxes as well as payroll taxes – and the new moniker “Fiscal Cliff” has been adopted to describe the devastating effect this will have on the U.S. economy if it is allowed to happen.

 

As of January 1 of this year the AMT exemption reverted back to what it was 20 years ago.  Through a series of successive and annual temporary “patches” over this 20-year period, the exemption has been indexed for inflation so as to keep the number of Alternative Minimum Tax payers relatively constant – currently approximately 4 million taxpayers.  These patches generally have been for just one year at a time because the cost of doing them is so large – the current one-year estimate is $40 billion.  Some day there may be a permanent fix, but it is unlikely that this will happen anytime soon.

 

The 2011 AMT exemption amount, itself the product of last year’s patch, was $48,450 for single taxpayers and $74,450 for married couples filing jointly.  What this exemption amount generally means is that a taxpayer’s Alternative Minimum Taxable Income (AMTI) for 2011 had to be more than $48,450 higher ($74,450 for couples) than the taxpayer’s Regular Tax taxable income before the AMT even would begin to apply.

 

For 2012, these exemption amounts revert back to $33,750 for single taxpayers and $45,000 for married couples filing jointly, and will stay there unless Congress acts to update them for inflation.  The significant difference in these exemption amounts equates to 26 million new AMT payers.

 

Congress returns for its post-election lame duck session in early November, takes a long Thanksgiving break, and then returns for just a few more weeks before the final adjournment of the 112th Congress.  The Congressional agenda is over-full, with too many things to do in addition to taxes to get them all done by year-end.  In just in the tax area it has to deal with the expiration of the “Bush tax cuts,” the expired estate tax, and dozens of other “tax extenders” – those miscellaneous provisions in the tax law that expired on December 31 of last year.

 

Stay tuned for developments on the patch – “conventional wisdom” is that Congress will get this done, but it is likely to be the normal mad scramble as this and all of the other legislative needs are addressed in this short post-election time period.

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

Real Estate and the Alternative Minimum Tax – Even the President of the United States Gets Tripped Up

Monday, May 28th, 2012 | Print This Post Print This Post | Email This Post Email This Post

Owning real estate is a major source of pain felt by folks stuck in the Alternative Minimum Tax, as the nondeductibility of property taxes is one of the single biggest reasons individuals are hit by this tax.  Even the President of the United States has been bitten, as we can be observed in some recently-released income tax returns.  But is living in the White House doing this?  It can’t be that, as the President is not the homeowner.  Instead, the problem stems from any President’s choice to keep connections with a vacation home in his original neighborhood.

 

Property taxes

 

State and local taxes, including income taxes as well as property taxes, are a tax item found on the returns of nearly 95 percent of all folks caught in the Alternative Minimum Tax.  This is due to the fact that, while state and local taxes are an allowable itemized deduction for purposes of the Regular Tax, not one dollar of these taxes is allowed as a deduction in computing the AMT.

 

The President’s AMT dilemma

 

Even after moving into the White House, our current president chose to keep his former home, located on the south side of Chicago.  As such, it is he who remains responsible for making the monthly mortgage payments as well as for the property taxes on the home.  It’s a decent-sized house, with a value something in excess of $1 million.  Take Chicago’s and Illinois’ relatively high property tax burden, along with a hefty state income tax burden, and the President finds himself writing a fairly sizable AMT check each year.

 

The President’s AMT planning opportunity.

 

The President’s planning opportunity to lessen his tax burden is the same as it is for every other AMT payer – taking advantage of any opportunity to accelerate the payment of property taxes, or possibly to delay paying them if that works better, the deduction should be put in a year he is not in the Alternative Minimum Tax.  Like many individuals, our current president is an individual taxpayer who moves in and out of the AMT from year to year.  Because of this, thousands of dollars of Alternative Minimum Tax could be saved by using this simple planning strategy.

 

Other AMT issues

 

Interest paid on a mortgage used to acquire a president’s home is deductible both for the Alternative Minimum Tax as well as for the Regular Tax, so that generally is not a part of the problem.  A large AMT item that does hit, however, is the phaseout of the AMT exemption.  Because the President’s income was relatively high, the entire exemption amount of $74,450 that he and his wife otherwise were entitled to on their joint return was eliminated in its entirety.

 

Conclusion

 

Everyone potentially is subject to the Alternative Minimum Tax.  While in prior years our current president was not hit by it, a combination of a high level of income and the state and local tax itemized deduction ended up triggering the nasty beast.  Like many taxpayers, discovering this at the time of preparing the tax return is too late to do anything about it for that year.  The good news, however, is that there is still plenty of time to do planning for 2012’s taxes to minimize the potential impact of the AMT hitting once again.

Posted in AMT Exemption, AMT Items, AMT Planning in General, State Income & Other Taxes | No Comments »

IRS Statistics Show the Alternative Minimum Tax Decreasing – What Gives?

Saturday, January 14th, 2012 | Print This Post Print This Post | Email This Post Email This Post

Periodically the IRS publishes what it calls its Statistics of Income Bulletin.  This document reports data that has been compiled from all of the tax returns filed for the previous year, including data on the Alternative Minimum Tax.  This year’s report shows that, for the first time after six straight years of the AMT increasing, the amount of AMT paid and the number of taxpayers paying it decreased from the previous year.  Are we finally seeing some needed relief from this burden?  Hardly; rather it is just another result of the terrible economy we find ourselves in.

 

Fall 2011 SOI Bulletin

 

The Fall 2011 Bulletin includes statistics for tax returns filed in 2010 for the tax year 2009.  For this period a total of 142.5 million individual income tax returns were filed, 3.8 million of which were Alternative Minimum Tax payers paying a total of $22.6 billion of AMT.  These figures represent a decline from the previous year, during which 3.9 million individuals paid the AMT in the total amount of $25.7 billion.  For tax year 2009 the average AMT paid was $5,900, compared to $6,500 for the previous year.

 

Who are the AMT payers?

 

The Bulletin breaks down the makeup of AMT payers by level of adjusted gross income (AGI).  Even with the decline, this data shows that the distribution stayed essentially the same as the prior year, with 24% of AMT payers being those in the $100-200,000 AGI range and the majority – 63% – being in the $200-500,000 range.  So many of those well below what President Obama considers “the rich” are stuck paying this tax that originally was designed to hit only the true wealthy.

 

Why did the AMT burden drop?

 

The explanation for the decrease in number of AMT payers and total dollars of Alternative Minimum Tax paid is not the result of any change in our government’s tax policy, unfortunately, but rather is explained simply by the current economic downturn.  Specifically, as incomes decrease individuals are having less of those items that trigger the AMT.  This applies both on the deduction side of the Alternative Minimum Tax as well as on the income side.

 

- Itemized deductions, in particular the deduction for state and local taxes

 

The amount of itemized deductions taken by individuals decreased from 2008 to 2009.  The one most important to Alternative Minimum Tax payers, the deduction for state and local income taxes and property taxes, itself decreased 7.5 percent.  As all AMT payers know, the more state and local taxes paid, the greater the Alternative Minimum Tax burden.  It follows logically, therefore, that lower taxes paid potentially means a lower AMT burden.  This won’t necessarily apply to all taxpayers, particularly those whose state legislators saw fit to increase taxes such as Illinois, but in general this result follows.

 

- Capital gains and dividend income

 

Capital gains and dividends are taxed at the same low rate both for the Regular Tax as well as the Alternative Minimum Tax.  However, the more of these items a taxpayer has the more the taxpayer’s AMT exemption will be phased out and the correspondingly higher his Alternative Minimum Tax burden will be.  It follows, therefore, that the worse the stock market does, and the more that companies cut back on their dividends, the less that individuals will see this impact on their AMT exemptions.  Again, this won’t necessarily apply across the board, but it generally explains the result.

 

What should AMT payers do?

 

Planning to minimize the Alternative Minimum Tax is the same regardless of any changes in a taxpayer’s individual position.  If an individual was on the cusp and the current state of the economy dropped him out of the AMT, there are opportunities to time some of his income and deductions to take advantage of this.  For example, folks not in the AMT may want to accelerate the deduction of property taxes to take advantage of the opportunity to get a Regular Tax benefit that is not available once back in the AMT.  But caution needs to be exercised as a slight change in facts can throw the individual right back into the AMT again.  So planning still is, and always will be, the key.

 

As taxpayers get ready to undertake preparation of their 2011 taxes, this information will be very useful in thinking about 2012 planning.  Certainly the 3.8 million still stuck in the AMT need to do this, as well as the 100,000 that dropped out of the AMT last year.

 

Posted in AMT Exemption, AMT Items, AMT Planning in General, Capital gains & Dividends, State Income & Other Taxes | 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 »

Year-End Tax Planning – Should You Accelerate or Defer Income to Minimize Your Alternative Minimum Tax?

Saturday, November 19th, 2011 | Print This Post Print This Post | Email This Post Email This Post

In connection with year-end tax planning, much has been written about accelerating or deferring deductions.  The sometimes-overlooked question of accelerating or deferring income deserves just as much attention, especially for those in the Alternative Minimum Tax.  This article will look at what needs to be considered in planning around income recognition, including a summary of the different types of income to which this planning can apply.

 

What happens with the AMT calculation when one’s income level changes?

 

Tax brackets for the Alternative Minimum Tax are progressive, as are those of the Regular Tax.  What this means in simple terms is that additional amounts of income are taxed at a higher rate than the tax rates that apply to the lower levels of income.  The Regular Tax has six brackets, ranging from 10% to 35%, while the AMT has just two – 26% and 28%.  As will be explained below, however, there are other adjustments in computing taxable income that actually can make these stated tax brackets significantly higher.

 

What are the real AMT brackets?

 

In calculating the Alternative Minimum Tax, an individual is allowed to subtract an exemption amount from what otherwise would be taxable income.  This exemption amount is $74,450 for a married couple in 2011.  As has been discussed in previous articles, however, the exemption is phased out as a taxpayer’s income increases.  This phaseout has the direct  effect, therefore, of increasing the effective AMT tax rates for individuals who find themselves in this phaseout range.

 

For 2011, for the married couple, the phaseout begins at $150,000 and doesn’t stop until their income exceeds $440,000.  Within this range, each incremental $100 of income will result in a loss of $25 of the AMT exemption.  The result is that a 28% Alternative Minimum Tax bracket is increased by a factor of 25%, resulting in an effective AMT tax bracket of 35%!

 

What does all this mean for planning?

 

Knowing one’s effective tax bracket is the only way to do proper AMT planning.  It can be a costly mistake to deliberately accelerating income, thinking one is in an Alternative Minimum Tax bracket lower than the Regular Tax bracket, only to find out this actually is not the case.  Many year-end tax planning articles routinely suggest that people in the AMT do exactly this, but without knowing what your effective AMT tax rate is it could instead turn out to be a costly mistake.

 

What types of income can be accelerated or deferred?

 

The answer to this question will depend on each individual’s situation- i.e., whether the person is employed or self-employed, what kind of investments the person has, etc.  Discussed below is a brief overview of some of the types of income that an individual may be able to accelerate or defer at year-end.

 

-  Employee compensation such as bonuses and stock options

 

Some employers allow employees the choice of taking their bonuses currently or deferring them to a future year.  In addition, employees may be granted stock options, and the timing of when these options are exercised is entirely up to the employee – they can be exercised just as easily in December as they can in January.  If the employee has what are known as nonqualified stock options, taxable income will be recognized immediately on the date of exercise – both for the AMT as well as Regular Tax purposes.  If the options are qualified options (these are more commonly known as incentive stock options, or ISOs), there is no taxable income on the date of exercise for Regular Tax purposes, but there is for the Alternative Minimum Tax.

 

-  Business income from self-employment, LLCs or partnerships

 

A business usually has some degree of control at year-end over its net income for that last month of the tax year.  For example, a cash-method business could pay outstanding bills in December to reduce income, or wait to pay them in January, which would directly affect the amount of income reported on the business owner’s tax return.  The business also could hold off from sending out certain bills out towards the end of the year, thus postponing income into the following year.

 

-  Investment income

 

Here are some acceleration or deferral thoughts on a few types of investments:

 

Capital gains – an individual has complete control over the timing of any sales of investments, so capital gains easily could be recognized this year or next.

 

Rental income – a landlord might ask for the rent check that is due on January 1st to be paid a few days early.

 

Interest and dividends – as a longer-term strategy, an individual could shift in or out of bonds and/or dividend-paying stocks to affect the amount of interest and dividend income received on a current basis.

 

Conclusion

 

Knowing what tax bracket the taxpayer is in is critical to any tax planning, but especially so for individuals in the Alternative Minimum Tax.  The only way to minimize the AMT is to take a little time as we approach year-end to look at the options available in terms of what income might be moved between 2011 and 2012, and then to figure out which of these choices will result in the lowest tax burden.  With the holiday season keeping everybody pretty busy, it’s never too soon to start doing at this!

Posted in AMT Exemption, AMT Items, AMT Planning in General, Calculation of the AMT, Capital gains & Dividends, Incentive Stock Options Exercised, Investor, Self Employed, Type of Taxpayer | No Comments »

Year-end Tax Planning Newsletter Focusing on the Alternative Minimum Tax – October

Saturday, November 12th, 2011 | Print This Post Print This Post | Email This Post Email This Post

Oct2011-Newsletter

Posted in AMT Exemption, AMT Planning in General, Calculation of the AMT | No Comments »

IRS Announces 2012 Inflation Adjustments, Once Again Highlighting the Need for Another Alternative Minimum Tax “Patch”

Friday, October 21st, 2011 | Print This Post Print This Post | Email This Post Email This Post

As it does in the fall of every year, the IRS has calculated the effect that inflation has had on the income tax brackets that are used to compute the individual income tax, and it recently has announced what the tax brackets will be for 2012.  These adjustments are required under the tax law, but they are limited to the Regular Tax brackets only – no similar adjustments are made for the Alternative Minimum Tax.  Unless Congress specifically addresses the issue with another AMT Patch, this mismatch will result in approximately 25 million additional taxpayers becoming subject to the AMT in 2012.

 

The Patch

 

The Patch, as it is famously known, is the mechanism used by Congress to offset the failure of the tax law to automatically require an adjustment of the AMT brackets for inflation.  This failure, with the resulting need for the annual Patch, has been going on since 2000, over a decade now.  The reason for the constant one-year fixes, or “patches,” is simple – it has been estimated that a permanent fix would cost in excess of one trillion dollars.  While the one-year fixes in and of themselves are expensive, there is simply no way that Congress could ever find enough money to do a permanent fix in the absence of a complete overhaul of our U.S. tax system.

 

The AMT exemption

 

The actual Patch mechanism is the making of an adjustment to the Alternative Minimum Tax exemption amount.  For a married couple filing a joint return, for 2011 the exemption amount is $74,450 (other filing statuses have different exemption amounts).  What this means is that taxable income for AMT purposes will be $74,450 less than what it otherwise would be, after increasing Regular Tax taxable income for the numerous AMT adjustment items.  The purpose of this is to ensure that folks at lower levels of taxable income, and folks who don’t have very many AMT items, are not caught in the AMT net.

 

What happens if there is no Patch

 

If Congress does not enact another Patch, the exemption amount will drop significantly, all the way back to what it was in 2000.  For a married couple, this would equate to an exemption of only $45,000 – 40 percent less than what it is today.  This substantial drop in the exemption would result in the 25 million additional AMT payers mentioned above.

 

When will Congress act?

 

Although one can never predict when Congress will get around to doing things, as we have seen time and time again Congress does tend to postpone dealing with difficult issues until the very last moment.  Thus, even though these 25 million individuals technically become AMT payers on January 1, 2012, the average time it has taken Congress to enact the Patch is seven months into the tax year.  Thus, if they followed this average we won’t know until July, 2012 what the revised exemption amount is.  But don’t’ assume July – twice during the past decade it has actually taken Congress until December to enact the Patch.

 

The “Patch watch”

 

Congress knows what it needs to do.  All that can be done is to wait, and watch and monitor the goings-on in Washington.  Future articles will be doing exactly this, and reporting on any developments when they occur.

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

IRS Releases 2011 Version of Form 6251 – Alternative Minimum Tax-Individuals, a Reminder That It’s Time to Start Thinking about Year-End Tax Planning

Saturday, September 24th, 2011 | Print This Post Print This Post | Email This Post Email This Post

The IRS recently released its 2011 version of the Form 6251 – Alternative Minimum Tax – Individuals.  With year-end only a few months away, this serves as a timely reminder that anyone stuck in the AMT needs to start thinking about the ways they can reduce this burden.  The most effective AMT planning strategies must be implemented by December 31 in order to have any impact on the current year’s taxes.  This article provides a general overview of some of the more important of these planning strategies.

 

AMT exemption amount

 

Late last year Congress once again adjusted the AMT exemption amount for inflation -   for 2011 it is $74,450 for married couples filing a joint income tax return and $48,450 for singles.  While Congress hasn’t even started thinking about the “patch” that will be needed again on January 1, 2012, we can guess that at some point that will be taken care of.

 

Phaseout of the exemption

 

For taxpayers whose incomes reach a certain level, the exemption is gradually phased out.  This phaseout is at the rate of $1 of exemption lost for every $4 of income above the threshold.  For 2011 the threshold for marrieds filing jointly is $150,000, and for singles it is $112,500.  If a couple’s income is $160,000, for example, the exemption is reduced by $2,500.  If the couple’s taxable income reaches $447,800, the exemption is zero.

 

Capital gains and dividends

 

While capital losses may be more typical these days due to the stock market’s wild gyrations, it’s important to note the AMT impact that results from capital gains as well as dividend income.  These sources of income are taxed at the same 15% rate for both the AMT as well as the Regular Tax, but there is a direct impact on an individual’s AMT burden because of the exemption phaseout discussed above.  For example, a $10,000 capital gain by itself can result in $700 of AMT being paid (loss of $2,500 of exemption times the marginal AMT rate of 28%).

 

Itemized deductions – state and local income taxes

 

The one item that affects the greatest majority of folks stuck in the Alternative Minimum Tax is the itemized deduction for state and local income taxes.  While allowable for the Regular Tax, this deduction is disallowed in its entirely for the AMT.  For taxpayers who expect to be in the AMT for 2011, serious consideration should be given to postponing payment of some portion of these taxes into 2012.  If the taxpayer is not in the AMT in 2012, real tax dollars can be saved that otherwise would have been “wasted” by not ding this basic planning.

 

Itemized deductions – property taxes

 

The next biggest item in terms of AMT exposure is property taxes which, similar to state and local income taxes, are not deductible in computing the Alternative Minimum Tax.  Many taxpayers receive their property tax bills in the fall, with a period of months before the taxes are actually due.  Just as with the state income tax planning mentioned above, taxpayers currently in the AMT might be better off pushing the payment of these property taxes into 2012.

 

Other AMT items

 

There are quite a few other AMT items in addition to those mentioned above.  Some of these items are deductions from income that are allowed for Regular Tax purposes but not allowed for the AMT, while others are certain types of income that are treated differently for the Alternative Minimum Tax.  The Form 6251, available on the IRS’ web site, serves as a list of all of these items.  Taking a look at last year’s tax return serves as a great starting point to see which items are likely to affect the taxpayer again this year.

 

The value of planning

 

The average amount of AMT paid by each taxpayer caught in its tentacles is over $5,000.  Just a little bit of time spent on basic tax planning can result in some significant amounts being saved!

Posted in AMT Exemption, AMT Items, AMT Planning in General, Capital gains & Dividends, State Income & Other Taxes, Uncategorized | No Comments »

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