Notwithstanding all the talk of
taxpayers avoiding paying any income tax during this year’s political coverage,
the alternative minimum tax (AMT) is poised to claim its greatest
number of victims in 2012.
Taxpayers are subject to two federal
income tax systems: regular income tax and AMT, and are required to pay the
greater of the two. Although the AMT was originally enacted in 1969 to ensure
that "wealthy" taxpayers paid their fair share in income taxes, over
the years it has ensnared an ever larger number of taxpayers. The most recent
IRS report indicates that for returns filed in 2010 for tax year 2009, a total
of 142.5 million individual income tax returns were filed. Of these, 3.8
million were subject to the AMT for a total tax of $22.6 billion due. 24% of
AMT filers were those with an adjusted gross income of between
$100,000-$200,000, and 63% of AMT filers were in the $200,000-$500,000
range.
As personal income tends to rise
each year, an ever greater number of taxpayers are finding themselves subject
to the AMT. This is primarily due to the lack of indexing of the AMT rates
(starting at 26% and going to 28%) and exemption amounts, while regular income
tax rates and exemptions have steadily increased with inflation through the
years. Other factors which can increase one’s vulnerability to the AMT are
incentive stock options, large capital gains, large amounts of certain itemized
deductions, and large families with a high number of personal exemptions.
Congress has passed 14 annual AMT
patches since 2003 to raise the AMT exemption amounts and thereby reduce the
number of taxpayers subject to its sweep. Currently, for the 2011 filing year,
the AMT exemption is $74,450 for joint filers, $48,450 for unmarried persons.
The exemption is phased out for higher income taxpayers. The 2012 AMT exemption
amounts have reverted to their levels in tax year 2000 ($45,000 for joint
filers, $33,750 for single filers). It is far from certain that additional AMT
patches will continue to be passed, causing this reduction in the AMT exemption
amounts to vastly increase the number of taxpayers subject to the AMT.
With the proper planning, the amount
of AMT exposure can often be reduced. Planning will entail the timing of
income, gains, and deductions over multiple years. If you require assistance
with your 2011 return preparation or planning for your 2012 taxes, please
contact Serge O. Bechade at
617 456 8016 or sbechade@princelobel.com in the firm’s Corporate Practice Group.