The AMT Trap (and temporary relief)

This blog will expound upon regarding two key provisions in the recently enacted “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.” The provisions extend partial 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 2009, meaning that more than 20 million additional taxpayers would have faced paying the tax on their 2010 tax returns without the new relief.

• A Brief overview of the AMT
The AMT is a second tax system which does not permit several of the deductions found under the regular tax system. For example, your property tax deduction. Taxpayers who may be subject to the AMT must calculate their tax liability under the regular federal tax system AND under the AMT system by 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. AMT was originally enacted to make sure that wealthy Americans did not escape paying taxes; however, it has started to apply to more middle-income taxpayers.

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. For 2010, those amounts were scheduled to fall back to the amounts that applied in 2000: $45,000 for those married filing jointly. This would have brought millions of additional middle-income Americans under the AMT system, resulting in higher federal tax bills for many of them.

• New law provides temporary relief
To prevent the unintended result of having millions of middle-income taxpayers fall prey to the AMT, Congress has once again relied on a temporary “patch” to the problem. Under the new law, for tax years beginning in 2010, the AMT exemption amounts are increased to: (1) $72,450 in the case of married individuals filing a joint return and surviving spouses; (2) $47,450 in the case of unmarried individuals other than surviving spouses; and (3) $36,225 in the case of married individuals filing a separate return. For tax years beginning in 2011, the AMT exemption amounts are increased to: (1) $74,450 in the case of married individuals filing a joint return and surviving spouses; (2) $48,450 in the case of unmarried individuals other than surviving spouses; and (3) $37,225 in the case of married individuals filing a separate return.

• Personal credits may be used to offset AMT through 2011
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 have been enacted which permit such credits to offset the AMT liability.

If a permanent fix is not put into place before 2012, these extensions are once again set to lapse and the AMT trap will have a much further reach into Americans' pockets. I hope this information is helpful. If you would like more details about this or any other aspect of the new law, please give us a call.

brad@mcarthurco.com
704.544.8426