While the nation is focusing on the tax implications of the ongoing fiscal cliff negotiations for 2013 and beyond, few realize there are also tax implications that will affect tens of millions of Americans for the 2012 Tax Year in the form of Alternative Minimum Tax (AMT), and time to address them is running out.
Enacted in 1969 and modified to its existing form in 1982, the Alternative Minimum Tax was originally designed to make sure that the very rich don’t avoid paying taxes altogether. In a nutshell, the AMT system is a parallel tax system with a essentially flat tax rate, a higher exemption amount and fewer deductions allowed. Taxpayers pay the higher of the two amounts as calculated using the regular tax system and the AMT system.
Whether intentional or not, what was originally conceived to affect only the very rich — 155 high-income households in 1969 — is now affecting more and more taxpayers because the exemption amount has not been automatically adjusted for inflation. Since the 1990’s, Congress passes an AMT “patch” every year or two to raise the exemption amount temporarily to exempt most of the taxpayers that would otherwise be affected. However, the last patch expired at the end of 2011. Unless Congress does something in the next few days, the AMT exemptions revert to $45,000 for married taxpayers and $33,750 for individuals (from $74,450 and $48,450 respectively). With the lowered exemptions, an estimated 28 million more households would need to pay AMT in 2012.
By law, every taxpayer is obligated to figure out whether they have to pay AMT on line 45 of Form 1040, which requires the use of the AMT worksheet. If a taxpayer is required to pay AMT, a special Form 6251 must also be filled out.
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