A last-ditch effort on the part of liberal Democrats in the House to send the big tax cut extension bill back to the Senate has failed. With last night’s favorable vote, an AMT Patch for 2010 and 2011 has now been passed by Congress, included as a part of “The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.” The bill now goes to President Obama, who is expected to sign it into law as soon as he receives it.
What the Patch actually does
As has been mentioned in previous articles, “the Patch” simply is an adjustment to the AMT exemption amount that individuals are allowed as a deduction in computing their Alternative Minimum Taxable Income. The new law sets the 2010 exemption levels at $ 72,450 for married couples filing jointly and $ 47,450 for single individuals. Without this adjustment, the exemption amounts would have reverted to their much smaller equivalents from ten years ago, with the unfortunate result that 28 million new taxpayers would have been pulled into the AMT for the first time.
Effect on those already in the AMT
While the Patch primarily is designed to keep the 28 million new taxpayers from getting caught in the AMT, there also is a significant benefit to the four million individuals already there. This benefit is the avoidance of as much as additional AMT of nearly $ 8,000 for married folks and nearly $ 4,000 for singles, had the exemption levels fallen back to their levels a decade ago.
Taxpayers by level of income who benefit from the Patch
The IRS Statistics of Income report for 2008, just recently released, shows that the majority of AMT payers – 62% – fall within the $ 200-500,000 income range. Taxpayers making between $ 100-200,000 comprise 22% of AMT payers while those in the $ 50-100,000 range make up another 5%. Without the Patch, the number of folks at these levels and below filing the Form 6251, Alternative Minimum Tax – Individuals, would have grown dramatically.
Different types of taxpayers who benefit from the Patch
With respect to what types of taxpayers are affected by the Patch, the entire spectrum is included. This includes employees receiving regular paychecks, self-employed individuals running their own businesses, and investors as well as retirees. There are so many different ways of becoming ensnared in the AMT that its tentacles reach out and pull in every single category of individual taxpayer.
AMT planning between now and year-end
With only two weeks left in the year, much still can be done to lower an individual’s 2010 Alternative Minimum Tax liability. The key to doing this is the fact that individuals are cash method taxpayers, and, therefore, income that can be pushed to 2011 will not be taxed this year (and vice-versa), and checks that can be written by December 31 become eligible deductions in 2010 (and, again, vice versa). These types of changes will directly affect the calculation of an individual’s AMT liability.
As an example, the biggest single item pushing people into the AMT is the itemized deduction for state and local taxes. This includes income taxes as well as real estate taxes, and it represents an AMT item that affects nearly 95 percent of all individuals who are stuck in the AMT. The simple act of whether and to what extent an individual pays these state and local taxes by December 31, or waits until January 1, can represent a significant savings opportunity.
Don’t wait any longer – with the Patch now enacted, there’s no excuse for anyone not to be doing year-end AMT planning right now!
George Bauernfeind is with AMTIndividual, providing analysis, customized strategies, and an online dual tax calculator planner to help you reduce your Alternative Minimum Tax. Visit www.amtindividual.com or www.amtblog.com to read more tax planning articles or to access this tax software on the Alternative Minimum Tax.