Do you consider yourself wealthy? Most people do not, especially during these challenging economic times. But just because you don't feel like a high-earner doesn't mean you are immune to something that was originally created to ensure that the rich and powerful paid their fair share of taxes: the alternative minimum tax or AMT. The Texas Society of CPAs explains what it's all about and provides an update on the newest tax laws affecting the AMT.
Created to Level the Playing Field
The AMT was originally introduced in 1970 because Congress wanted to ensure that the rich paid a fair minimum tax on their income. It had become clear that some high-income people were able to find so many tax breaks that they were paying virtually no federal taxes. The AMT is a parallel tax with its own separate set of rules and forms. However, the rates that determine who is subject to the AMT have not kept pace with inflation, which means that now a sizable number of middle-class taxpayers are affected by the tax. While the tax applied to a few thousand people when first enacted, today millions are subject to the AMT, including many families making under $100,000 a year.
The AMT does not apply to all of your income, and Congress regularly updates the amounts that are exempt. Under the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, passed late last year, the AMT exemption amounts for 2010 are $47,450 for unmarried individuals and $72,450 for married individuals filing jointly. Those are the amounts you'll use in preparing your 2010 return in time for this year's April deadline. For next year's return, the 2011 amounts are $48,450 for single taxpayers and $74,450 for married people filing jointly.
An Initial Delay
In addition, the Internal Revenue Service announced late last year that as many as 13.5 million taxpayers who use any of five forms that relate to the AMT would have to delay filing their tax returns while the IRS updated its forms and its computer systems in light of the new law's changes. The IRS announced it was was expected to be ready to receive these returns by mid-to-late February, but your CPA can offer more information on whether your return will be affected.
Good tax planning can help minimize some of the AMT impact. For example, one downside of the AMT is the possibility that you won't be able to benefit from common deductions, such as the deduction for property taxes. While the property tax deduction is available for those paying the regular income tax, it is not valid for taxpayers subject to the AMT. Let's say you believe you will be hit with the AMT in 2012 but not for current 2011 income. In that case, you should try to make your first property tax payment for 2012 late this year so that you can deduct it on your income tax form for 2011. In addition, if you are not subject to the AMT in future years, it may be possible to claim a credit for a refund of some of what you laid out in the years when you did have to pay AMT.
Reprinted from Texas Society of Certified Public Accountants and American Institute of Certified Public Accountants.