I am writing to provide details regarding key provisions in the recently enacted 2012 American Taxpayer Relief Act which provide permanent relief to individual taxpayers from the alternative minimum tax, or AMT. Earlier temporary measures to deal with the unintended creep of the AMT's reach expired at the end of 2011, meaning that millions of additional taxpayers would have faced paying the tax on their 2012 returns without the new relief.
Brief overview of the AMT.
The AMT is a parallel tax system which does not permit several of the deductions permissible under the regular tax system, such as property taxes. Taxpayers who may be subject to the AMT must calculate their tax liability under the regular federal tax system and under the AMT system taking into account certain “preferences” and “adjustments.” If their liability is found to be greater under the AMT system, that's what they owe the federal government. Originally enacted to make sure that wealthy Americans did not escape paying taxes, the AMT has started to apply to more middle-income taxpayers, due in part to the fact that the AMT parameters are not indexed for inflation.
In recent years, Congress has provided a measure of relief from the AMT by raising the AMT “exemption amounts”—allowances that reduce the amount of alternative minimum taxable income (AMTI), reducing or eliminating AMT liability. (However, these exemption amounts are phased out for taxpayers whose AMTI exceeds specified amounts.) For 2011, the AMT exemption amounts were $74,450 for married couples filing jointly and surviving spouses; $48,450 for single taxpayers; and $37,225 for married filing separately. However, for 2012, those amounts were scheduled to fall back to the amounts that applied in 2000: $45,000, $33,750, and $22,500, respectively. This would have brought millions of additional middle-income Americans under the AMT system, resulting in higher federal tax bills for many of them, along with higher compliance costs associated with filling out and filing the complicated AMT tax form.
New law provides permanent fix.
To prevent the unintended result of having millions of middle-income taxpayers fall prey to the AMT, Congress has once again applied a “patch” to the problem by extending the 2011 exemption amounts, increased slightly, but this time the patch is intended as a permanent fix. Under the new law, for tax years beginning in 2012, the AMT exemption amounts are increased to: (1) $78,750 in the case of married individuals filing a joint return and surviving spouses; (2) $50,600 in the case of unmarried individuals other than surviving spouses; and (3) $39,375 in the case of married individuals filing a separate return. Most importantly, these amounts will indexed for inflation after 2012, meaning that the annual “patches” will no longer be needed.
Personal credits may be used to offset AMT.
Another provision in the new law provides AMT relief for taxpayers claiming personal tax credits. The tax liability limitation rules generally provide that certain nonrefundable personal credits (including the dependent care credit and the elderly and disabled credit) are allowed only to the extent that a taxpayer has regular income tax liability in excess of the tentative minimum tax, which has the effect of disallowing these credits against the AMT. Temporary provisions had been enacted which permitted these credits to offset the entire regular and AMT liability through the end of 2011. The new law extends this provision permanently.