Congress provided the most suspense in many years last December when it comes to the Alternative Minimum Tax (AMT). For most of the month, the news see-sawed from good to bad with regard to the annual patch for the AMT. With only days left in 2010, the yearly patch was approved along with many other tax law changes, with the passage of the 2010 Tax Relief Act.
2010 AMT Patch and Exemption Limits
This crucial decision means that 26 million taxpayers won’t have to pay the AMT for the first time, and decreases the amount of the alternative minimum tax required for the 4 million Americans who must pay the tax.
There is more good news for taxpayers who pay the AMT. The child tax credit has now been added to the list of credits that that can be deducted when calculating the AMT.
The last-minute patch is particularly helpful because previous legislation called for the exemption figures under the AMT to actually decrease for 2010 to $33,750 for individuals and $45,000 for joint filers. The exemption is the amount of income that the AMT does not affect, so lowering that figure means increasing the alternative minimum tax. Instead, Congress raised the exemption limits for 2010 – and for the first time in many years – approved a patch for two years at the same time.
The new exemption limits for 2010 are $47,450 for joint filers, $36,225 for individuals and $72,450 for married couples filing jointly. In 2011, those figures are $48,450 for single and head of household filers, $37,225 for individuals and $74,450 for married people filing jointly.
Understanding the AMT and Annual Patch
The Alternative Minimum Tax was established in 1969 and is a separate tax system that exists side-by-side with the traditional method of deductions and exemptions used by the majority of Americans. The goal of the AMT was to make sure that richer taxpayers who are able to lower their tax obligations with a variety of different deductions, credits and exemptions still pay at least a minimum amount of tax.
However, the law that set up the AMT did not include a provision to adjust the figures yearly to take into account increases in the cost of living. The yearly patch is necessary to make sure that the AMT doesn’t affect less affluent Americans – which was never the intent of the tax in the first place.
Every taxpayer must compare their tax payments under the regular tax process and the calculations for the alternative minimum tax and pay the higher of the two rates. Under the traditional tax calculations, deductions, credits and exemptions are subtracted from a taxpayer’s total income. Under the AMT, most itemized deductions, along with the standard deduction and personal exemptions are not allowed. So for example: a taxpayer with eight kids might have to pay the AMT. The 10 personal exemptions would not be allowed under calculation for alternative minimum tax.
Check with your tax preparer to learn more about the AMT. The IRS also has a calculator on its website to help taxpayers figure out if they are affected by the AMT. But don’t worry: The AMT calculation is automatically included in computations made by all leading tax software and any tax professional should be well versed in the ways of the alternative minimum tax.