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What If Congress Fails to Provide an "AMT Patch" for 2010?

Tax

By Ron Kramer

The Congressional Budget Office (CBO) reported that, for 2009, 4 million taxpayers were affected by the Alternative Minimum Tax (AMT). If Congress fails to provide another temporary fix (an “AMT patch”) for 2010, the CBO estimates that the number of taxpayers subject to the AMT in 2010 will increase to 27 million. The CBO claims that without the AMT patch, 1 in every 6 taxpayers will be affected by the AMT, paying, on average, an additional $3,900 in tax. The AMT will affect almost all married couples with incomes of between $100,000 and $500,000. This tax increase would seem to violate President Obama’s pledge of no new taxes on couples making less than $250,000 per year.

Some form of “minimum” tax has been in the U.S. tax code since 1969. As originally enacted, the minimum tax was designed to ensure that high-income individuals paid at least some tax each year. According to the CBO, the original minimum tax applied to only about 20,000 taxpayers in 1970.

The current version of the minimum tax, the AMT, has been law since 1982. There are several reasons for the expansion of the AMT to many more taxpayers over the years. The first reason is that neither the AMT tax brackets nor the exemption from AMT is indexed for inflation. A second reason is that the Bush tax cuts have reduced the regular tax rates for certain taxpayers without a corresponding reduction in the AMT rates, thus catching more taxpayers.

As previously noted, the exemption from the AMT is not indexed for inflation or increased for family size. For 2009, Congress provided an AMT patch (and has done so since 2001) that temporarily raised the exemption to $70,950 for married joint filers and to $46,700 for single taxpayers. This AMT patch expired at the end of 2009. If a new patch is not provided for 2010, the exemption amount will revert to the lower statutory amounts of $45,000 for married taxpayers and to $33,750 for single taxpayers. Also, the exemption from AMT is phased-out for high-income taxpayers by an amount equal to 25% of the amount by which alternative minimum taxable income (AMTI) exceeds $150,000 for married couples ($112,500 for single taxpayers). It should also be noted that the $150,000 and $112,500 phase-out thresholds, like the exemptions themselves, are not indexed for inflation. Thus, under a no-patch 2010 law, the AMT exemption amount for married taxpayers ($45,000) phases-out over an AMT income range of $150,000 to $330,000 (as compared to $150,000 to $433,800 in 2009).

Taxpayers calculate their tentative AMT liability by applying the AMT rate schedule and exemption phase-out schedule to AMTI. (I’ll spare you the mind-numbing details of how the tax is actually computed.) The AMT tax rate is 26% on the first $175,000 for married taxpayers and $87,500 for single taxpayers, and 28% on any excess of the AMT tax base (as noted, these rate schedules are not indexed for inflation). In the mechanics of the AMT calculation, the phase-out of the AMT exemption raises the effective marginal rate of AMT tax throughout the phase-out range by 25% of the statutory rate. Therefore, in 2010 under a no-patch law, married taxpayers will pay the following effective marginal AMT rate on AMT income ranging from $150,000 to $380,000 (the phase-out range):

 

Marginal AMT Rate

Statutory AMT Rate

26%

28%

Dividends & Capital Gains (15% Income)

21.5%

22%

Regular Income

32.5%

35%

 

The CBO predicts that taxpayers with incomes of between $200,000 and $500,000 will be the hardest hit by the AMT. The CBO states that 98% of taxpayers in that income range will have AMT liability for 2010, up from 77% in 2009. These taxpayers will pay an additional $10,700 in tax, on average. Taxpayers in this income range are most affected because much of their income is taxed at rates of 25% or lower for regular tax purposes, as compared to the higher AMT rates of 26% and 28%.

The following example illustrates the potential effect on 2010 AMT if Congress fails to enact an AMT Patch.
Assumptions:
      1. Married taxpayer with three children
      2. $250,000 of wage income
      3. $10,000 of net long-term capital gains (15% income)
      4. Itemized deductions
               a. State income taxes $16,000
               b. Mortgage interest $26,000

 

2010 AMT Patch -  Same as 2009

2010 No AMT Patch

AMT Increase (Decrease)

Wages

$ 250,000

$ 250,000

 
Capital Gain Income

10,000

10,000

 
Total/Adjusted Gross Income

260,000

260,000

 
Itemized Deductions

42,000

42,000

 

Personal Exemptions

18,250

18,250

 
Taxable Income

$ 199,750

$ 199,750

 
       
Regular Income Tax

42,874

42,874

0

AMT

3,879

12,426

8,547

Total Tax

$ 46,753

$ 55,300

$ 8,547

The additional $8,547 of AMT results from a reduction in the 2010 AMT exemption amount from $70,950 to $45,000.

Summary and Conclusion
If Congress fails to enact an AMT patch prior to December 31, 2010, many more taxpayers will find themselves subject to the AMT for this year. Several times in the past, Congress has acted on the AMT patch late in the year. This year may be no exception. We will keep you posted regarding any action taken by Congress on the AMT patch when the legislators return to Washington on November 15. In the meantime, consult with your Schneider Downs tax advisor to implement tax-planning strategies to guide you through the remainder of 2010 and prepare you for the expected tax changes coming in 2011.  If you are not currently a client of Schneider Downs, please contact Ron Kramer at rkramer@schneiderdowns.com for more information on tax-planning strategies.

 

 

Schneider Downs provides accountingtax, wealth management, technology and business advisory services through innovative thought leaders who deliver the expertise to meet the individual needs of each client. Our offices are located in Pittsburgh, PA and Columbus, OH. 

This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax-related matter.

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