After snooping around a bit, I found the reason was related to the calculation of "Alternative Minimum Tax" or "AMT". I had heard rumblings about that bit of the tax code needing to be "patched" but didn't quite understand what that meant, mostly because it had NEVER affected me before. It took a little bit of reading, and reading between the sometimes-ambiguous lines on the tax forms to figure out how my tax liability had suddenly jumped up, even for the 2012 tax year, so now that I have it boiled down to the nuts and bolts, I'm posting an explanation here to save a few others the trouble of sorting it out on their own.
Note that the announced "fiscal cliff deal" supposedly fixes this, but the tax law hasn't changed yet, and neither has the "early release" tax software I have. This may end up being a moot point, but even if it describes a bomb that didn't get dropped, someone may still find it informative.
- Update 1/2/2013 - Still not done, but closer. - ABC News Article
So, here's what the Alternative Minimum Tax requires a tax payer to calculate.
- The regular "Taxable Income" is calculated as usual by reducing the "Adjusted Gross Income" (AGI) by either a standard deduction ($11,900) or the total amount of itemized deductions (if that is more than $11,900), and then further reducing that by a fixed amount, $3,800, for each personal exemption.
- Example: Suppose a married couple with two kids (total of 4 personal exemptions) had an AGI of $90,000 and total itemized deductions of $13,000 (made up of $6000 in mortgage interest and charitable donations and $7000 of state tax and property tax). Their taxable income would be $90K - $13K - (4 * $3,800) = $61,800.
- Example (continued): $61,800 + $7,000 + (4 * $3,800) = $84,000
- Example(continued): The 2011 exemption amount for a married couple was $74,500, so AMT taxable income $84,000 would be reduced by $74,500, leaving $9,500.
- Example (continued): The AMT tax rate in this case is 26% (and it jumps to 28% for AMT taxable income over $175K), so in this case the tax amount is $9,500 * 0.26 = $2,470. The normal tax on the original $61,800 taxable income would be $8,424, which is higher than the AMT tax amount anyway, so in 2011, AMT would not even apply... but keep reading about 2012 below...
- See 2011 tax table: http://www.irs.gov/pub/irs-pdf/i1040tt.pdf
- See 2011 form 6251 (AMT): http://www.esmarttax.com/uploadedfiles/media/tax_forms/2011/2011-federal-6251.pdf (looking for an IRS direct link but 2012 is the only one there right now.)
- Regular taxable income is calculated the same way
- Same example: $61,800
- Same example: $84,000
- Example: As of 1/1/2012, the official 2012 Married-Filing-Jointly exemption is only $45,000, so $84K - $45K leaves $39K to be taxed at 26%. This means the AMT tax amount is $10,140. This WOULD be higher than the regular tax amount on taxable income of $61,800, which was only $8424. So, that would be $10,140 - $8,424 or...
$1,716 EXTRA TAX DUE ON APRIL 15th!!
- See 2012 Tax table: http://www.irs.gov/pub/irs-dft/i1040tt--dft.pdf
- See 2012 form 6251 (AMT): http://www.irs.gov/pub/irs-pdf/f6251.pdf
- Note: As of 1/1/2013, the exemption amounts are not on the 6251 form. The form says to refer to the instructions for the exemption amount on line 29. However, the 2012 instructions were not out yet. Check this IRS.gov page to get a copy of the 2012 form 6251 instructions when they're finally published.