Here it is, almost the end of the year, and as they have done for several years, Congress has not indicated if they will extend the higher AMT exemption amounts or allow them to revert to lower amounts that were in effect before exemptions were increased to shield the middle class from the punitive tax. A recent Congressional report indicates that, if Congress does not extend the AMT break, one in five taxpayers will be impacted by the AMT in 2012.
Originally conceived to combat taxpayers in the higher-income brackets who utilized legal tax shelters and tax preferences to avoid paying income tax, the AMT can be tricky and hit you when least expected. The tax was supposed to inflict a “minimum” tax on those who were able to avoid the regular tax. However, years of inflation have pushed many middle-income taxpayers into the reach of the AMT. Although there is a long list of items that can trigger the AMT, for most individuals, the triggers include the following or a combination of the items listed below:
- Preference income from exercising stock options from an employer’s qualified plan, sometimes referred to as incentive stock options (ISOs);
- Having large itemized tax deductions;
- Having large miscellaneous itemized deductions;
- Large itemized deductions for state income or sales tax, real property tax and personal property tax;
- Large medical itemized tax deductions;
- Home equity debt interest deduction; and
- Interest income from private activity bonds.
Because of its unintended impact on the middle class, Congress has been promising AMT reform. In the meantime, annually increasing the amount of income exempted from AMT has been their temporary fix, and what that amount will be for 2012 is what Congress has yet to decide. Complicating the issue is that the AMT as it is currently structured provides a significant amount of tax revenue that Congress is reluctant to concede without a replacement. Most analysts have been predicting the higher exemptions will be extended for 2012, and possibly into 2013. But you never know, and we will have to wait and see.
There are planning techniques that can be used to avoid or mitigate the effects of the AMT. If you anticipate an AMT problem this year, it may be appropriate for you to make an appointment to see if there are any steps that can be taken to alleviate the effects of the AMT in your specific tax situation.