Overview of AMT
The Alternative Minimum Tax (AMT) was created to ensure that high income taxpayers paid a minimum amount of tax each year by limiting certain deductions. Everyone who files a tax return technically computes her tax liability under the regular tax and under AMT, and pays the higher tax of the two systems.
The purpose of this post is to explain how the AMT will hit many taxpayers who may not consider themselves super-rich if the AMT patch is not extended into 2012.
A very simplified explanation of the AMT is that the AMT begins with regular taxable income and adds back certain deductions. Taxpayers take this sum and subtract from it the AMT exemption. The remainder is subject to a 26% or 28% tax bracket.
What is the AMT Patch?
The AMT patch mainly refers to the amount of the AMT exemption. In 2011, the AMT exemption amount was $74,450 for joint filers and $48,450 for single taxpayers. If the AMT patch does not get enacted during the fiscal cliff negotiations, the AMT exemption amounts for 2012 will be $45,000 for joint filers and $33,750 for single taxpayers.
How Will Not Passing the AMT Patch Affect Taxpayers?
Michael and Kay are married and file a joint return. Michael has wages of $50,000 and Kay has wages of $60,000.
They have the following expenses:
- Property Taxes $8,000
- State Income Tax $5,000
- Charity $5,000
- Mortgage Interest $10,000
If the AMT patch is extended, then Michael and Kay’s tax liability will be:
Regular Tax
Gross Income $110,000
Less:
Property Taxes $8,000
State Income Tax $5,000
Charity $5,000
Mortgage Interest $10,000
Personal Exemptions $7,400
Total Deductions $35,400
Taxable Income $74,600
Federal Income Tax $10,880
AMT
Regular Taxable Income $74,600
Add Deductions Disallowed by AMT:
Property Taxes $8,000
State Income Taxes $5,000
Personal Exemptions $7,400
AMT Income $95,000
Less: AMT Exemption $74,450
Balance $20,550
Times 26% AMT Rate $5,343
Since regular tax ($10,880) exceeds AMT ($5,343), Michael and Kay are not subject to AMT. Their total tax for the year is their regular tax of $10,880.
However, if the AMT patch is not extended, Michael and Kay’s AMT will be:
AMT
Regular Taxable Income $74,600
Add Deductions Disallowed by AMT:
Property Taxes $8,000
State Income Taxes $5,000
Personal Exemptions $7,400
AMT Income $95,000
Less: AMT Exemption $45,000
Balance $50,000
Times 26% AMT Rate $13,000
Since Michael and Kay’s AMT of $13,000 exceed their regular tax of $10,880, their AMT liability will be $2,120 ($13,000 AMT less regular tax of $10,880) and their total tax for the year equals their AMT liability of $13,000.
Therefore, a couple that probably doesn’t consider themselves to be super-rich gets hit with a $2,120 AMT bill.
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Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.
Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230