Forty-four years ago a new tax system was created to ensure that the wealthy paid at least some tax.
It wasn't necessarily a bad idea, but the newly created alternative minimum tax (AMT), had a major flaw. It was not indexed for inflation.
That meant that as years went by and incomes increased, more people who weren't rich got caught in the AMT's trap. To determine if you must pay the AMT, you have to figure your ordinary tax bill and then calculate the AMT damage, which could be substantial because some major breaks, such as state and local income tax and property tax deductions, aren't allowed.
For years (and years and years), Congress dealt with the issue of more and more middle income taxpayers being caught in the AMT trap by upping the amount of income that triggers the tax.
Too often, however, Congress was very late in acting <cough … fiscal cliff … cough> meaning that taxpayers couldn't make timely tax moves to counter AMT effects.
That shouldn't be a problem any more.
As part of the American Taxpayer Relief Act (ATRA) enacted on Jan. 2, AMT exemption amounts are now indexed for inflation.
That's a legislative move important enough to qualify as today's Daily Tax Tip.
The 2012 income exemption amounts — yes, the bill signed this year made them retroactive to last year — are:
- $78,750 for a married couple filing a joint return and surviving spouses
- $50,600 for singles and heads of household
- $39,375 for a married person filing separately
Those amounts will come into play as you file your 2012 returns by this April 15 or Oct. 15 if you get an extension.
And now, thanks to ATRA, you can make 2013 tax plans and moves with regard to the AMT.
The 2013 tax year AMT exemption amounts are:
- $80,800 for a married couple filing a joint return and surviving spouses
- $51,900 for singles and heads of household
- $40,400 for a married person filing separately
So while it's not the elimination of the AMT as some hope will eventually happen, at least the automatic inflation adjustments are a big step in making it easier for filers to deal with the parallel tax.
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