Tuesday, January 1, 2013

Alternative Minimum Tax (AMT) for 2012 Taxes

I bought a copy of the HRBlock At Home tax software early this year so I could figure out how much extra withholding to request on my last paycheck to avoid an under-payment penalty. After putting in all the rough numbers, which are basically the same as they were last year, I noticed that my total tax liability was considerably higher than last year... by a few thousand $$.  This puzzled me because I didn't think the "fiscal cliff" tax issues affected 2012 taxes.

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. 

So, here's what the Alternative Minimum Tax requires a tax payer to calculate.
  1. 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.
  2. Then to calculate the "gross" AMT income, all state tax, local/city tax, or property tax and personal exemptions get ADDED BACK
    • Example (continued): $61,800 + $7,000 + (4 * $3,800) = $84,000
  3. Then a single "AMT exemption" amount, which is primarily based on filing status, is subtracted from the "gross" AMT income.
    • 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.
  4. Then, an "alternative" tax amount would be calculated on the AMT taxable income amount (i.e the amount left over after the AMT exemption is subtracted from the "gross" AMT income).
    • 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.)
In 2012 (unless the AMT is "patched") the AMT exemption amounts are being drastically reduced.  So this is what would happen in the example above where the exemption amount is now $45,000 instead of $74,500.

  1. Regular taxable income is calculated the same way
    • Same example: $61,800
  2. State and local / property taxes and personal exemptions are still added back for AMT purposes
    • Same example: $84,000
  3. HERE'S WHERE 2012 IS DIFFERENT!! The MUCH SMALLER AMT EXEMPTION AMOUNT is subtracted to find the final amount of AMT taxable income.
    • 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.

Summary and Commentary

If the federal government doesn't "patch" the AMT exemption amounts, a lot of people with so-called "middle class"income levels will get slapped with a big chunk of extra taxes, due in April of 2013, on their 2012 income.  There's no time left to make adjustments.  For most people, they'd have to accumulate the money to pay the extra tax in the first few months of 2013.  As everyone knows, the economy is already in bad shape thanks to the out-of-control government spending and economic reluctance due to looming regulation and tax increases.  This would pile on by taking a few thousand dollars out of the economy for a very large number of families (perhaps 20 to 30 million families).  If the problem isn't fixed as part of the "fiscal cliff deal," that would remove 20 to 30 billion dollars from the already hurting economy to be spent instead on government programs that have been well proven to NOT motivate anywhere near as much useful economic activity.  Considering the "multiplier effect" (Google it if you don't know what that is) that could cause more like 250 billion in economic damage.  Then the economy shrinks, and the tax rate has to go up again to cover the cost of the rampant spending.  Then more damage is done by clamping off economic growth with a higher percentage of the whole economy executed as inefficient government spending, and the spiral continues until everything collapses.

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