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Tax Foundation Sounds AMT Alarm

by Mike Godfrey,, Washington

19 December 2012

If the United States Congress cannot reach a deal on the "fiscal cliff" by the end of the year, the Tax Foundation has pointed out that the tax increases represented by the 2012 changes to the Alternative Minimum Tax will be felt early next year.

The Tax Foundation notes that "the AMT is comparable to a parallel universe - it's a completely separate income tax system, with its own definitions of taxable income, tax rates, tax brackets, deductions, and exemptions."

The 26% AMT, or 28% on higher incomes, applies to individual taxpayers with incomes above specific thresholds. For many years Congress has been enacting temporary "patches" to index these income thresholds for inflation in order to prevent millions of taxpayers from being subject to the AMT. The last such patch expired on December 31, 2011.

More specifically, for tax year 2011, the AMT exemption amount (as indexed for inflation) was USD48,450 for individuals and USD74,450 for married taxpayers filing jointly. Because of these thresholds, only about 4m taxpayers paid AMT for tax year 2011. Under current law, however, there is no patch in place and thresholds revert to much lower levels for 2012 - USD33,750 for individuals and USD45,000 for married taxpayers filing jointly. At these levels, approximately 33m taxpayers would pay AMT for tax year 2012 (with returns filed in the spring of 2013).

Under the "normal" individual income tax, the Tax Foundation comments, Congress can and often does change tax laws retroactively, because a tax return is not filed until the April after the tax year for which it applies. It observes that "it's quite possible for Congress to go ‘over the cliff’ and then re-enact most or all of the Bush-era tax cuts later on during the year - taxpayers can reclaim their overpayments when they file their 2013 tax return in April 2014."

However, the AMT changes have already happened, and, it confirms, "a very substantial tax increase will affect millions of 2012 tax returns to be filed only months from now unless Congress does something about it" by the end of the year.

"When taxpayers file a return," the Tax Foundation explains, "they calculate their liability under both the regular tax and the AMT, and they owe whichever is higher. For the vast majority of taxpayers, the regular tax is higher than the AMT, and it's not something they need to worry about. However, for certain taxpayers (generally upper-middle class families with children) tax liability under the AMT can be significantly higher than the regular tax."

“The Internal Revenue Service (IRS) is currently putting together the tax forms to use next year to file 2012 taxes, and as far as it's concerned, this year's AMT parameters are what they were twenty years ago, despite 60% inflation since then," the Foundation concludes. "Once January 1st comes, the clock runs out - the year is over and the IRS needs to release the forms so that people can file their returns. Again, this is in contrast to the rest of the fiscal cliff tax provisions, which expire a year later and will affect the 2013 tax return that you file in 2014, not the one you file next year."

TAGS: individuals | compliance | tax | tax compliance | law | Internal Revenue Service (IRS) | tax authority | tax rates | United States | individual income tax

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