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Alternative Minimum Tax: Now It’s Personal

March 30, 2012

James J. Bailey, MST, CPA, CFP®
Partner
BlumShapiro

The alternative minimum tax (AMT) could be out to get you.

This stealth tax, originally aimed at only the highest echelon of taxpayers, is expected to apply to four million taxpayers on 2011 returns, according to the Tax Policy Center.  Even worse, the number is projected to explode to more than 31 million in 2012, absent any new legislation.

If you haven’t taken the AMT “personally” before, now is probably the time.  Here’s a quick review.

The general rules go like this:  the AMT is a tax system parallel to your regular tax liability.  After you have figured out your regular taxable income, AMT liability is calculated through four basic steps:

  1. First, you must add certain tax preference items to your taxable income and make other technical adjustments required by law.
     
  2. Then you subtract the special exemption amount on your tax return based on your filing status.
     
  3. Next, apply the AMT rate to the net amount.  The applicable rate is 26% on the first $175,000 of AMT income and 28% for amounts above $175,000.
     
  4. Finally, compare your AMT liability with your regular tax liability.  If the AMT is higher, you are required to pay the excess in addition to your regular tax liability.

The list of preferences and technical adjustments is too long for the space allotted here.  In brief, you are required to add back certain itemized deductions and personal exemptions.  That’s one reason why large numbers of taxpayers have become unsuspecting victims of the AMT.  For instance, taxpayers who report high state income tax deductions are particularly vulnerable. 

Ever since the monumental Economic Growth and Tax Relief Reconciliation Act (EGTRRA) was passed in 2001, Congress has gradually increased the exemption amounts to account for inflation.  But these AMT “patches” have been relatively small.  The latest increase is effective only for the 2011 tax year.  Unless subsequent legislation is enacted, the exemption amounts are scheduled to return to the levels they were before EGTRRA.

For 2011 returns, the exemption amount for joint filers is $74,450 (up from $72,450 in 2010).  If you are a single filer, the exemption amount is $48,450 (up from $47,450 in 2010).  Finally, for married couples filing separately, it is $37,225 (up from $36,225 in 2010).

However, the benefit of these exemption amounts is reduced for certain high-income taxpayers.  Each exemption is reduced by 25 cents for each dollar of AMT income over $150,000 for joint filers; $112,500 for single filers and heads of household; and $75,000 for married couples filing separately.  Despite the regular increases in exemption amounts, these figures have not been adjusted in recent years.

Reminder:  This is an extremely complex area of the tax law.  It is recommended that you seek assistance from a professional tax adviser.

James J. Bailey, Jr., MST, CPA, CFP®is a partner at BlumShapiro, the largest regional accounting, tax and business consulting firm based in New England, with offices in Connecticut and Massachusetts.  The firm, with nearly 300 professionals and staff, offers a diversity of services which includes auditing, accounting, tax and business advisory services.  In addition, BlumShapiro provides a variety of specialized consulting services such as succession and estate planning, business technology services, employee benefit plans, litigation support and valuation, and financial staffing.  The firm, with offices in West Hartford and Shelton, CT and Boston and Rockland, MA, serves a wide range of privately held companies, government and non-profit organizations and provides non-audit services for publicly traded companies.

 

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