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 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.
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.