A recent report by the Congressional Research Service projects that, unless Congress acts, the combined effects of inflation and the expiration of the 2001 and 2003 tax cuts will cause an estimated 30 million plus taxpayers – or roughly one-fifth of all taxpayers – to be hit by the AMT in 2012.
For 2012, the individual AMT exemption amounts fall to the “permanent” AMT exemption amounts in Code Sec. 55(d)(1) – unless Congress retroactively changes them:
- $33,750 for unmarried taxpayers
- $45,000 for joint filers
- $22,500 for marrieds filing separately
The 2001 and 2003 tax cuts provided temporary increases in the AMT exemption amounts as a means of mitigating the interaction between the reductions in the regular income tax and the AMT. These amounts have since been “temporarily” extended and increased over the years by a succession of tax laws. The latest, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the 2010 Tax Relief Act, P.L. 111-312, 12/17/2010), extended higher AMT exemptions amounts for two years (in a so called two-year AMT “patch”).
Similarly, the ability of individuals to use most nonrefundable personal credits to offset AMT has also been temporarily extended over the years so that individuals have been able to use most nonrefundable personal credits to offset AMT. For example, for tax years beginning during 2011, an individual could offset his entire regular tax liability and AMT liability by the nonrefundable personal credits.
The rule allowing nonrefundable personal credits to reduce the AMT (as well as regular tax) benefits middle income individuals who:
- have low taxable income (and thus a low regular tax), e.g., because of a large number of personal exemptions
- are subject to the AMT because personal exemptions (as well as the standard deduction and certain itemized deductions) generally aren't allowed in computing the AMT; and
- have substantial nonrefundable personal credits.
Unless there's a law change, for tax years beginning after 2011, nonrefundable personal credits – other than the adoption credit, the child credit, the savers' credit, the residential energy efficient property credit, the non-depreciable property portions of the alternative motor vehicle credit, the qualified plug-in electric vehicle credit, and the new qualified plug-in electric drive motor vehicle credit – will be allowed only to the extent that the individual's regular income tax liability exceeds his tentative minimum tax, determined without regard to the minimum tax foreign tax credit. For tax years beginning after 2012, the child tax credit and the adoption credit will also be subject to the above general limitation.
Further, under the regular income tax, the tax rate structure, the standard deductions, the personal exemptions, and certain other structural components are indexed so that they do not lose their real (inflation-adjusted) value over time. However, the structural components of the AMT are not indexed for inflation.
The lack of indexing means that over time, real AMT tax liabilities will increase because of inflation. The gap between tax liabilities under the regular income tax and the AMT will shrink, and many taxpayers could end up subject to the un-indexed AMT or experience reductions in their nonrefundable tax credits under the regular income tax.
Will you be subject to alternative minimum tax in 2012? If you need assistance with planning for AMT, please contact our tax planning and preparation group at 440-449-6800.