By Andrew D. Schwartz, CPA
Here we go again. On New Year’s Day 2012, the Alternative Minimum Tax (AMT) went from bad to worse. Due to a stop-gap provision that expired at the end of 2011, many more people could end up paying a lot more AMT this year. Experts predict that the number of people being hit by the AMT is on track to jump six-fold to 30 million taxpayers in 2012.
What is the AMT? When you calculate your taxes, you’re supposed to calculate them two ways. First, you figure your tax liability under the regular tax system. And then you re-calculate your taxes using the AMT rules. Whichever tax is higher is the one that you pay.
When calculating the AMT, certain tax breaks aren’t allowable, including your personal exemptions and your standard deduction if you don’t itemize. Itemizers are required to back out their state income taxes, real estate taxes, a portion of allowable medical expenses, all miscellaneous itemized deductions, and interest paid on home equity debt not used to purchase or improve a principal residence or second home. Anyone who realizes significant capital gains or exercises and holds Incentive Stock Options (ISO’s) generally ends up paying the AMT as well.
A great article about the AMT was posted on abcnews.com on February 9th. Check out:Income Taxes: 30 Million May Be Hit by AMT This Year by Alan Farnham. (Yes, I am the Andrew Schwartz quoted throughout this article, so please let me apologize up front for this shameless bit of self-promotion. However, the article is an excellent analysis of the current AMT mess we’re dealing with as part of the overly complex US Tax Code.)
There Is Hope
So the big question is whether Congress will implement another AMT Patch before it’s too late. When you factor in that this year is an election year, I am optimistic that either this Congress or the next Congress will do something about the current AMT crisis. With Congress and the President getting sworn in during January 2013, they will definitely get off to an extremely rocky start if 30 million taxpayers owe thousands of dollars in additional taxes due to their failure to enact an AMT patch as has been done many times during the past decade.