Legislation/tax law changes

National Taxpayer Advocate Rips the AMT and Calls for its Repeal

Sunday, February 3rd, 2013 | Print This Post | Email This Post

As she has each year for the past decade, IRS National Taxpayer Advocate Nina Olson calls once again in her annual report to Congress for repeal of the Alternative Minimum Tax. Using labels such as “difficult,” “complicated,” “burdensome,” and a “penalty” to describe the AMT, she also notes that it hits particularly hard those “taxpayers who have not done any tax planning.” Realistically, Congress is not about to repeal this money-making machine, so the only solution is for individuals to undertake some basic tax planning to minimize the effect of this tax. Some important criticisms of the AMT that are made by Ms. Olson in her report are set forth below.

The Alternative Minimum Tax has failed to achieve its original goal

The report cites statistics showing that more than 35,000 taxpayers with incomes above $200,000 pay no income tax at all – neither the Regular Tax nor the AMT. How can this be? The primary reason is that tax exempt municipal bonds, with the exception of so-called “private activity bonds,” are totally exempt from taxation, both for the AMT as well as the Regular tax. This is one of the “loopholes” that Congress has not closed.

The AMT hits middle-income families who live in high-tax states particularly hard

The tax law allows a deduction for personal exemptions in computing the Regular Tax, generally recognizing the fact that the larger a family is the more income it needs to spend on meeting basic needs. For 2013 this exemption is $3,900 per individual, so a family of four will not have to pay tax on the first $15,600 of income. Unfortunately, personal exemptions are disallowed in computing the Alternative Minimum Tax, which means that the larger the family the more likely the taxpayer will be stuck paying the AMT.

Also, the Regular Tax deduction for state and local taxes is not allowed for purposes of the Alternative Minimum Tax. Unfortunately, states with the highest state and local tax burden, and, thus, the highest AMT risk, are the most populous states – California and the New England states, including New York and New Jersey for example. Too many families are getting stuck with the AMT just because they have children and happen to live in a high tax state.

The AMT is complicated and burdensome

Compliance costs for dealing with the Alternative Minimum Tax are almost unbelievable. In a recent study the IRS estimated that taxpayers in the aggregate spent over 18 million hours completing and filing the AMT form, whether they needed to or not. This amounts to over 12 hours for each person who actually paid the tax. By comparison, the IRS estimates that it takes 22 hours to fill out the entire Form 1040. Way too much time is being spent on the AMT, much of it unnecessary.

Other calls for repeal

The Taxpayer Advocate isn’t the only one calling for repeal of the AMT. As noted in her report, in 1999 Congress voted to repeal the AMT but the legislation was vetoed by the President. Both the 2005 Tax Reform Panel and the 2010 National Commission on Fiscal Responsibility and Reform recommended repealing the AMT. Over the years both Democratic and Republican leaders in the House and the Senate have also proposed repealing it, but none of this ends up going anywhere.

Conclusion

The AMT is difficult to repeal, and most likely never will be repealed, because of the significant amount of revenue that it raises. Accepting this fact, the only thing individual taxpayers can do is to look out for themselves, and, as suggested by Ms. Olson, get involved in doing some basic tax planning.

Posted in AMT Items, AMT Planning in General, History of the AMT, Legislation/tax law changes, Personal Exemptions, State Income & Other Taxes | No Comments »

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

Saturday, January 5th, 2013 | Print 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 »

Alternative Minimum Tax Payers and the Fiscal Cliff – Now is the Time to Consider a Roth Conversion

Sunday, November 18th, 2012 | Print This Post | Email This Post

Individuals with IRAs and 401(k) accounts have the opportunity to do a Roth conversion before year-end, potentially saving thousands of dollars of taxes on their retirement plans by paying taxes now and not having to pay any taxes in the future. This opportunity deserves serious consideration by all taxpayers, but particularly so for individuals who currently are in the Alternative Minimum Tax or may be in the future.

What happens upon conversion?

The dollars an employee contributes to a regular 401(k) and a regular IRA generally are pre-tax. This means that income taxes have not yet been paid on these contributions; instead, taxes are paid when distributions are taken from the plan at retirement. Along with the original contributions, the investment earnings in the plan likewise are taxable when withdrawn. In contrast to these regular plans, a Roth plan is funded with after-tax dollars, so there are no taxes due at the time the funds are withdrawn, both for the original contributions as well as the accumulated earnings.

At the time of conversion from a regular plan to a Roth, income taxes must be paid on the full amount converted. With this prepayment of taxes, no taxes then are due when the money is taken out.

The key question

The most critical part of a Roth conversion analysis is the comparison between the taxpayer’s current tax bracket and the tax bracket in which he or she expects to be in retirement. The question is how does one go about making this comparison?

Current tax brackets

Under the current 2012 tax brackets, for the married filing jointly status the Regular Tax 28% bracket is reached at $142,700 of taxable income, the 33% bracket at $217,450, and the 35% bracket at $388,350. Compare this to the AMT bracket of 26% for Alternative Minimum Taxable Income up to $175K, and 28% for everything over that level. Looking at these brackets reveals something very interesting: AMT brackets are significantly lower at roughly comparable levels of income.

This fact alone is the reason individuals currently in the AMT need to give serious consideration to doing a Roth conversion. The potential for a 7% savings from differences in the tax brackets (28% vs. 35%, e.g.), or even more, definitely is there.

Tax brackets – there will be change

Making things a little more difficult, however, is the fact that tax brackets likely will change. The “Fiscal Cliff” means that, if Congress does not act soon, on January 1 Regular Tax rates will increase, and it will have been even more attractive to do a Roth conversion today rather than waiting until next year. Equally as important is the fact that tax brackets for most folks will be less in retirement than what they are today, simply due to the nature of our graduated tax rate system.

Conclusion

With year-end and the Fiscal Cliff approaching, every individual with a 401(k) or a regular IRA has a real opportunity to save taxes. This opportunity is much greater for taxpayers who currently are paying the Alternative Minimum Tax than it is for those who are not. A little time spent making a Roth conversion analysis easily could result in thousands of dollars in tax savings.

Posted in AMT Planning in General, Calculation of the AMT, Legislation/tax law changes | 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 | 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 112^th 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 »

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

Sunday, December 11th, 2011 | Print 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 »

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

Friday, October 21st, 2011 | Print 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 »

Index the Individual Alternative Minimum Tax Amounts for Inflation

Monday, July 4th, 2011 | Print 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 Hearing on Fundamental Tax Reform

Saturday, June 18th, 2011 | Print This Post | Email This Post

The Joint Committee on Taxation recently held a public hearing which it called a Roundtable Discussion on Ideas for Reforming the U.S. Internal Revenue Code. Much of the testimony addressed the need to reform the Alternative Minimum Tax. The quote below is just one example of many such comments made.

“Tax reform may also be more difficult due to the temporary nature of several key provisions in the tax code that significantly raise current official projections of future revenues, and greatly complicate any proposal for fundamental tax reform if it is required to replace all of these revenues (as was made clear in the report of the 2005 Tax Panel). Most important is the alternative minimum tax (AMT) which, despite annual congressional “patches” that limit its reach, is assumed in future years to raise significant revenues from a large fraction of middle income taxpayers. Similarly, official projections assume that all of the Bush tax cuts are allowed to expire, which also results in significantly larger future revenues.

“We believe that fundamental reform of the income tax structure is sufficiently difficult that the process of reform should not be encumbered by a requirement to raise additional revenues, which would ensure that many, if not most, taxpayers would end up being “losers” from reform, making the passage of reform virtually impossible from a political perspective. Although we understand that additional revenues will be needed in the future to address our nation’s deficit and debt problems as well as to eliminate the AMT, we believe that raising rates within a reformed tax structure to obtain additional revenues, in conjunction with spending cuts as part of a sweeping fiscal reform package, must be treated as a separate issue if fundamental tax reform is to be politically feasible. Moreover, we believe that such treatment should be extended to the AMT and the Bush tax cuts; that is, we propose that the revenue (and distributional) baselines for fundamental tax reform assume that the AMT patches and the Bush tax cuts will be permanently extended. Thus, we propose a two-stage approach to reform—a revenue-neutral fundamental tax reform under the assumptions outlined above, followed by fiscal reform that reduces future budget deficits while reaching a compromise on distributional issues.

“We propose an individual tax reform that would substantially reduce or eliminate many tax credits, deductions, and exemptions while consolidating and simplifying other tax preferences—that is, a base-broadening, rate-reducing (BBRR) reform similar to TRA86. TRA86 broadened the tax base by eliminating the exclusion for long-term capital gains, the investment tax credit, the deduction for two-earner families, income averaging, the deduction for state and local sales taxes, and the deduction for interest on consumer loans, including credit card interest. It also limited deductions for depreciation, passive activity losses, business meals and entertainment, medical expenses, and expanded the AMT to include deductions utilized by most households. Much of the resulting revenues were used to reduce rates, although standard deductions and personal exemptions were also increased significantly. However, TRA86 did not limit or eliminate the home mortgage interest deduction, the deduction for employer-provided health insurance, the deductions for state and local income and property taxes, the deduction for charitable contributions, or the exemption of interest on public purpose state and local bonds.”

Posted in Legislation/tax law changes | No Comments »

Joint Committee on Taxation – Tax Expenditures and the Alternative Minimum Tax

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

The Joint Committee on Taxation recently issued a report on tax expenditures. “Tax expenditures” are government spending that is accomplished through the Internal Revenue Code – in effect a negative tax. The tax expenditure term was created over 40 years ago by Stanley Surrey, then Assistant Secretary of the Treasury, as a way to describe the political use of tax breaks for means that were more typically accomplished through direct government spending.

Set forth below is an excerpt from this recent report – the part addressing the Alternative Minimum Tax. It makes for interesting reading, especially when one finds such comments as “the AMT is not viewed as part of normal income tax law.”

The report:

Under the Joint Committee staff view of normal tax law, compensatory stock options would be subject to regular income tax at the time the options are exercised and employers would receive a corresponding tax deduction. If the option has a readily ascertainable fair market value, normal law would tax the option at the time it is granted and the employer would be entitled to a deduction at that time. The employee’s income would be equal to the difference between the purchase price of the stock and the market price on the day the option is exercised.

Present law provides for special tax treatment for incentive stock options and options acquired under employee stock purchase plans. When certain requirements are satisfied, then: (1) the income that is received at the time the option is exercised is excluded for purposes of the regular income tax but, in the case of an incentive stock option, included for purposes of the alternative minimum tax (“AMT”); (2) the gain from any subsequent sale of the stock is taxed as a capital gain; and (3) the employer does not receive a tax deduction with respect to the option. The special tax treatment provided to the employee is viewed as a tax expenditure by the Joint Committee staff. However, it should be noted that the revenue loss from the special tax treatment provided to the employee is accompanied by a significant revenue gain from the denial of the deduction to the employer. The negative tax expenditure created by the denial of the deduction for employers is incorporated in the calculation of the tax expenditure.

The individual AMT and the passive activity loss rules are not viewed by the Joint Committee staff as a part of normal income tax law. Instead, they are viewed as provisions that reduce the magnitude of the tax expenditures to which they apply. For example, the AMT reduces the value of the deduction for State and local income taxes (for those taxpayers subject to the AMT) by not allowing the deductions to be claimed in the calculation of AMT liability. Similarly, the passive loss rules defer otherwise allowable deductions and credits from passive activities until a time when the taxpayer has passive income or disposes of the assets associated with the passive activity. Exceptions to the individual AMT and the passive loss rules are not classified as tax expenditures by the Joint Committee staff because the effects of the exceptions already are incorporated in the estimates of related tax expenditures. In one case the restrictive effects of the AMT are presented separately because there are no underlying positive taxexpenditures reflecting these effects: the negative tax expenditures for the AMT’s disallowance of personal exemptions and the standard deduction.

Posted in Incentive Stock Options Exercised, Legislation/tax law changes, Personal Exemptions, Standard Deduction, State Income & Other Taxes | No Comments »

Joint Committee on Taxation Explains the Recently-Passed AMT Patch

Thursday, February 3rd, 2011 | Print 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 »