Taxes and uncertainty seem to go hand and hand no matter what the period or economic forecast. Although businesses and investors call for certainty in the tax law so they can plan for the long term with a more predictable outcome, they are glad to accept tax breaks at any time. Add to such a moving target the ability of congress to raise or lower taxes retroactively to the start of a calendar year or provide tax breaks or increases through a time delayed or phased in implementation and unpredictability increases.
Congress created the Alternative Minimum Tax ("AMT") in 1969, targeting higher-income taxpayers who could claim so many deductions they owed little or no income tax. Tax laws provide tax benefits for certain kinds of income and allow special deductions and credits for certain expenses. The AMT attempts to ensure that taxpayers who benefit from certain tax advantages pay at least a minimum amount of tax. The AMT provides an alternative set of rules for calculating your income tax. In general, these rules determine the minimum amount of tax that the taxpayer should be required to pay. If regular tax falls below this minimum, the taxpayer would have to make up the difference by paying alternative minimum tax.
Because the AMT is not indexed for inflation, a growing number of middle-income taxpayers are discovering they are subject to the AMT. You may have to pay the AMT if your taxable income for regular tax purposes plus any adjustments and preference items that apply to you are more than the AMT exemption amount. The AMT exemption amounts are set by law for each filing status. For tax year 2011, Congress raised the AMT exemption amounts to the following levels:
- $74,450 for a married couple filing a joint return and qualifying widows and widowers;
- $48,450 for singles and heads of household;
- $37,225 for a married person filing separately.
The law imposes an AMT on an individual tax payer to the extent the taxpayers tentative minimum tax liability exceeds his or her regular income tax liability. An individual's tentative minimum tax ("TMT") is the sum of:
- 26% of the taxable excess as does not exceed $175,000 ( $87,500 in the case of a married individual filing separately) and
- 28% of the remaining taxable excess
The taxable excess is the amount by which the alternative minimum taxable income (AMTI) exceeds the exemption amount. If the regular income tax amount is greater than the TMT, no special action is required. If the TMT exceeds the tax calculated using the regular rules, the difference between the TMT and the regular tax is added to the regular tax amount, so the taxpayer pays the full amount of the TMT, although some of the tax is considered regular tax and some is considered AMT.
On a positive note,
the portion of the tax that is considered AMT may be available in later years as a "Minimum Tax Credit" reducing the regular tax due in later years, but not below the taxpayers TMT level in those later years.
The individual AMT attributable to deferral adjustments generates a minimum tax credit that is allowable to the extent the regular tax exceeds the tentative minimum tax in a future taxable years. Also, keep in mind, any unused tax credits are carried forward indefinitely.
The Tax Extenders and AMT Relief Act of 2008 ("TEAMTRA") provided for an individual Minimum Tax Credit allowable for any tax year beginning before 1/1/13 is not less than the greater of :
- 50% of the long term unused minimum tax credit or
a.The long term unused minimum tax credit for any taxable year means the portion of the minimum tax credit attributable to the adjusted minimum net tax for taxable years before the 3rd taxable year immediately preceding the taxable year.
- the amount (if any) of the AMT refundable credit amount for the taxpayers preceding year
For example, assume that Joe the plumber has a Long Term Minimum Tax Credit carry forward of $50,000 to 2007. The minimum AMT refundable credit allowable in 2007 is the greater of (1) $5,000, (2) $25,000 (50% x $50,000) or (3) $0 (i.e. the amount of the AMT refundable credit from the preceding year). For 2008, the minimum refundable credit allowable is the greater of (1) $5,000, (2) $12,500 (50% x $25,000), (3) $25,000 ( i.e. the amount of the refundable credit for the preceding year).
Prior to 2010, the tax law stated that some non-refundable personal tax credits were allowed only to the extent that an individual's regular income tax liability exceeds the individuals tentative minimum tax, determined without regard to the minimum foreign tax credit.
Non-refundable Personal Tax Credits:
- Dependent care credit
- Credit for elderly and disabled
- Child credit
- Interest on certain home mortgages for low income tax payers
- Hope Scholarship and Lifetime learning Credit
- Credit for savers
- Credit for certain non-business energy property
- Credit for residential energy efficient property
- Credit for certain plug-in electric vehicles and alternate motor vehicles
- Credit for non-business portion of new qualified plug-in electric drive motor vehicles
- D.C. first time home buyer credit
The Tax Relief and Unemployment Insurance and Reauthorization and Jobs Creation Act (" TRUIRJCA") of 2010 provision changed this law and now allows an individual to offset the entire regular tax liability and alternative minimum tax liability by the non-refundable personal credits for 2010 an 2011.
Congress created the Alternative Minimum Tax ("AMT") in 1969, targeting higher-income taxpayers who could claim so many deductions they owed little or no income tax. The AMT provides an alternative set of rules for calculating your income tax. Because the AMT is not indexed for inflation, a growing number of middle-income taxpayers are discovering they are subject to the AMT. Don't be caught by surprise. It is in your best interest to do some upfront tax planning and understand where you stand with regard to AMT.
Please contact us if you have questions concerning the Alternative Minimum Tax or any other tax compliance or planning issues.