# Surprise! The Alternative Minimum Tax (AMT) may catch millions more taxpayers in 2012.

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By: Charles W McGrath Jr CPA, CFP®. | December 1st 2012

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**2**012's taxes will be higher if Congress does not change anything. This article will help taxpayers anticipate how their 2012 tax bill will increase because of the Alternative Minimum Tax (AMT).

Calculating an individual's tax liability can be complicated. It gets even more challenging when there are two different methods. Since 1986, US taxpayers have been burdened with paying the higher of two tax calculation results, the regular tax or the AMT. If the current 2012 AMT methods and rates are not changed, as many as

**25 to 30 million**taxpayers may be subject to increased tax liability due to AMT when preparing their tax returns. The AMT that was designed to require a small number of high income individuals to pay some taxes can now ensnarl many middle income wage and pension income recipients.

Whole chapters in advanced tax textbooks have been written about the AMT. Rather than trying to explain the entire complicated topic, this document will narrow the focus to the AMT exemption amounts. Understanding AMT exemptions will help explain why many more taxpayers could be subject to AMT for 2012. This is the aspect of the AMT that Congress has changed the most during each of the last several years. Often, Congress increases the AMT exemptions late in the tax year. The last "patch" Congress passed expired at the end of 2011. However, since there are several tax issues to resolve this year, it is very possible that Congress will not adjust the 2012 exemption amounts.

**By not doing anything regarding the AMT exemptions, the federal government can significantly increase revenues generated without increasing tax rates. This is a "back door" way of collecting more federal taxes.**

Please note that the 2012 AMT calculation ignores capital gains and dividends. These types of income will continue to be taxed at 15% for the 2012 tax year.

The 2012 regular tax calculation allows taxpayers to subtract $3,800 from their adjusted gross income (AGI) for each exemption claimed on the tax return. (For example, a taxpayer is entitled to an exemption for themselves, their spouse and each qualified dependent that the taxpayer supports.) If a taxpayer is married and has two children, their tax return would subtract $15,200 ($3,800 times 4) from their AGI for the regular tax calculation. (If that taxpayer is in the 33% tax bracket, these exemptions can reduce the amount of regular taxes owed by over $5,000.) Once a taxpayer's adjusted gross income exceeds a certain level, the AMT calculation eliminates these individual exemption amounts and instructs taxpayers to subtract the following amounts (no matter how many exemptions the taxpayer is claiming) potentially increasing the federal taxes owed by this taxpayer almost $1,000 for each qualified dependent claimed on the tax return:

The 2012 AMT exemption amounts are significantly lower than 2011's and returns them to the amounts used for the 1998 tax year.

Furthermore, when alternative minimum taxable income (AMTI) exceeds the following amounts the AMT exemptions are reduced by 25% of the excess:

For a married couple filing a 2012 joint return, the $45,000 AMT exemption could drop to zero when their alternative minimum taxable income exceeds $330,000. This phase out means that for every $10,000 increase in their AMTI over $150,000, they lose $2,500 of the exemption amount and increase their taxes by approximately an additional $650 because of the 26% AMT tax rate.

Consider an example of a married couple with an oversimplified tax situation such that they have no dependents, capital gains or dividends. They have adjusted gross income equal to $165,000 and deductions approximating $12,000 for charitable contributions and state taxes. After considering their regular tax exemptions ($3,800 times 2), their regular tax will be approximately $29,000. Continuing this scenario, their AMTI equals $160,000 ($165,000 minus $5,000 of their charitable donations) so their 2012 exemption amount, because of the AMT phase out calculation explained in the table above, will be $42,500 ($45,000 minus 25% of $10,000). This would mean that $117,500 ($160,000 minus $42,500) of their income will be subject to the 26% AMT rate so their total AMT could equal $30,550 ($117,500 times 26%) (28% for the AMTI amount greater than $175,000). Since the AMT is greater than the regular tax in this scenario, this couple would pay an additional $1,657 for AMT. If another couple had more dependents or larger AMT adjustments and preferences (like state and local taxes paid), the difference between the regular tax and the AMT could increase by even larger amounts.

Although there are many complicated aspects of the AMT calculation, the most common occurrences that can cause AMT issues are when a taxpayer has large deductions for state and local taxes, large miscellaneous deductions (the kind that appears near the bottom of the Schedule A) and many dependents (usually children) who are claimed as exemptions. Unfortunately, since the AMT is close to a "flat rate" tax system with limited deductions, there are few tax planning steps a taxpayer can do to avoid the AMT surprise. If Congress does not increase the AMT exemption amount for 2012, many more taxpayers need to recognize that their 2012 tax bill may be higher than 2011's even with the same level of income and deductions. Many of these taxpayers may not have withheld enough during the year from pay and retirement checks to cover their 2012 taxes and will be surprised by the large remaining balance owed in April 2013. Please do not shoot the messenger when the tax preparer conveys the bad news after using professional software to complete the complicated calculations.

**This article was prepared by Charles W McGrath Jr CPA, CFP®. You can contact him for further information at cmcgrath@mcgrathcpa.net or 480-951-1040.**

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