What’s Next for the AMT?

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AMTRecently, politicians agreed to a partial “fiscal cliff” fix. The portion that has been agreed to was the tax portion, while the spending portion of the fiscal cliff will be attacked in a couple of months, along with what is sure to be a knock-down, drag-out fight over the debt ceiling.

But, for now, there is a tax deal, and it includes the first-ever permanent patch for the alternative minimum tax (AMT).

Indexing the AMT to Inflation

Ever since a version of the AMT was first introduced in 1969, there have been problems with implementing. The main issue has always been that the AMT was designed to ensure that high earners pay a minimum amount tax, without seeing a large number of deductions and credits that reduce liability. However, the AMT was implemented with a dollar amount as a threshold. Over time, as the definitions of “rich” and “middle class” have shifted, the dollar amount has ended up trapping middle class households.

In order to avoid causing hardship to middle class taxpayers, patches have been regularly applied to the AMT. Now, though, the AMT exemption will connected to inflation. This is a permanent patch that ensures that the dollar amount that marks the threshold for the AMT will move higher along with inflation.

For 2012, the AMT exemption has been increased to $78,750 for those married filing jointly, and to $50,600 for those who are filing singly. This is a good thing, since without this change to 2012 rules, the exemption would have reverted to what it was in 1993, which would have represented a huge setback for middle class families, since that threshold was $45,000 for married filers and $33,750 for single filers.

Moving forward, the fact that the AMT will be indexed to inflation will help keep the mark moving higher, without the need for Congress to try and make deals and attach a temporary patch as part of some other bill. It’s always been something of a nail-biter regarding the AMT patch, and now some of that uncertainty is gone. On top of that, some income earners making between $45,000 and $105,000 can now use the child credit, lifetime education credit, and other credits that can keep them out of the clutches of the AMT.

Do You Owe the AMT?

The only way to find out if you owe the AMT is to do your taxes twice. You can usually use tax software to help you calculate your taxes under AMT rules, as well as under “regular” rules. Your accountant can also help. Or, if you want to do it by hand, you can use IRS Form 6251.

After you figure out your taxes under both rules, you can then see whether you owe more money. If your tax liability under the “regular” rules is higher, then you don’t need to worry about the AMT. If your tax liability under the AMT is higher, then you need to pay extra, making up the difference between the “regular” calculation and the AMT calculation.

In the end, this might be one of the best things to come out of the fiscal cliff deal. What do you think?

(Photo: Tax Credits)

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