AMT, the Tax We Love to Hate
Millions of taxpayers will be snared by the alternative minimum tax in 2011. Find out if you’re one of them -- and what to do about it.
About four million unlucky taxpayers will discover that they must pay the alternative minimum tax when they file their 2011 tax returns next year. For most, it can be a nasty surprise, wiping out crucial deductions and exemptions they normally claim, resulting in a bigger tax bill.
SEE ALSO: Brace Yourself for Tax Changes in 2012
But if you knew in advance that you might be subject to the AMT, you could make some smart year-end tax-planning decisions to mitigate the damage. We’ve created a simple calculator to help you figure out if you might be an AMT victim.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
The AMT is a parallel tax system created more than 40 years ago to prevent excessive use of tax breaks by the very wealthy, ensuring they paid at least some tax. But because it was never indexed for inflation, the AMT has morphed from a “class tax” into a “mass tax”, affecting millions of middle-class Americans each year. The number of taxpayers owing the AMT grew from about 20,000 in 1970 to about four million in 2011, according to the nonpartisan Tax Policy Center.
The AMT does not allow deductions for state and local taxes, home-equity loan interest (unless the borrowed money was used for home improvements), or tax and investment expenses -- write-offs that save money in the regular tax world. Nor does it allow personal exemptions -- worth $3,700 this year -- for yourself, your spouse and each of your dependent children. Consequently, taxpayers with large families or those who live in high-tax states, such as California and New York, are more likely to find themselves subject to the stealth tax.
Normally, if you pay quarterly estimated state income taxes or have a real estate tax bill due in January, you can prepay it in December and boost your deductions on your 2011 federal tax return due next spring. But if you're subject to the AMT, this sooner-rather-than-later strategy won't work for you.
Beyond denying such write-offs for taxes, the AMT also puts the squeeze on deductions for medical expenses. In the regular tax world, medical costs in excess of 7.5% of adjusted gross income can be deducted. In AMT-land, the threshold is 10% of AGI. (The AMT does, however, permit tax deductions for charitable contributions, so you can go ahead and make your usual year-end donations.)
The top AMT rate is 28%, well below the 35% at which the regular tax maxes out. But because more income can be taxed by the AMT, you could wind up with a bigger tax bill. In fact, you only owe the AMT when it costs you more than the regular tax.
Although the AMT exemption is not indexed for inflation, in recent years Congress has protected millions of taxpayers by passing temporary patches to raise the level, usually one year at a time. Taxpayers whose income exceeds the AMT exemption must calculate both regular tax and AMT liability and pay the larger amount. For 2011, the AMT exemption is $48,450 for individuals and $74,450 for married couples filing jointly.
But unless Congress acts, exemption levels will drop to $22,500 for individuals and $45,000 for married couples filing jointly in 2012, exposing 31 million taxpayers to the AMT next year, according to Tax Policy Center estimates.
That means virtually 100% of married couples with incomes between $50,000 and $475,000 -- even those who claim the standard deduction -- would be subject to the AMT next year unless exemption levels are raised, says Michael Kitces. Kitces is the director of research for the Pinnacle Advisory Group, in Columbia, Md., and developed the data that serves as the basis of our AMT calculator. Single taxpayers are threatened, too. Without another patch, almost all single taxpayers with income between $150,000 to $300,000 will be subject to the AMT in 2012.
So check out our calculator before you decide to pay state income or real estate taxes in December that you could put off until January. If it looks like you’ll be an AMT victim, don’t bother.
Sneak preview: new tax benefits -- as well as burdens -- for 2012
To continue reading this article
please register for free
This is different from signing in to your print subscription
Why am I seeing this? Find out more here
-
Is a Phased Retirement Right for You?
Want to keep working, just not as hard? A phased retirement may just be the answer.
By Kimberly Lankford Published
-
Four Tips to Make Your Sales Presentation a Winner
Being prepared and not being boring can go a long way toward persuading a potential customer to buy into what you’re offering.
By H. Dennis Beaver, Esq. Published
-
'Instant' EV Tax Credits Are a Hit: $580M Paid This Year
EV Credits Claiming federal electric vehicle tax credits at the point of sale is a new and popular option in 2024.
By Kelley R. Taylor Last updated
-
Retirees Face Significant Tax Bills Due to Fraud
Fraud A new report sheds light on how older adult scam victims end up with big tax bills and lost retirement savings.
By Kelley R. Taylor Last updated
-
Tax Day: Is the Post Office Open Late?
Tax Filing Tax Day means some people need to mail their federal income tax returns.
By Kelley R. Taylor Published
-
High Earners: Beware of These Illegal Schemes to Lower Taxes
Tax Schemes The IRS says high-income filers are targets for several illegal tax schemes.
By Katelyn Washington Last updated
-
Mailing Your Tax Return This Year? What to Know Before You Do
Tax Filing There are plenty of reasons not to mail your tax return this year, but here’s what you should know if you are.
By Katelyn Washington Last updated
-
A Bunch of IRS Tax Deductions and Credits You Need to Know
Tax Breaks Lowering your taxable income is the key to paying less to the IRS. Several federal tax credits and deductions can help.
By Kelley R. Taylor Last updated
-
IRS Warning: Beware of Smishing and 'Helper' Tax Scams
Scams Tax season is a time to look out for email and text message scams.
By Kelley R. Taylor Last updated
-
Most Expensive States to Live in for Homeowners
Property Taxes High property tax bills make the places on this list the most expensive states for homeowners to live in.
By Katelyn Washington Last updated