As we start our year end planning, we continue to be faced with reality that unless Congress acts soon tens of millions of Americans will be hit with the Alternative Minimum Tax (AMT) for 2010. So, unless Congress acts to fix the AMT problem more than 26 million taxpayers will be subject to this tax. For most this will be an unexpected suprise on April 15, 2011.
AMT is a hard tax to protect against. The tax was first enacted by Congress in 1969. The AMT was created in reaction to some very wealthy, very high-income individuals paying no regular income tax. These high-income individuals were able to do this because they were able to claim a huge amount of tax credits and deductions. At the time there was only about 200 taxpayers that were effected by this tax.
To combat this, Congress created an alternative tax system. Yes there are two tax systems with different rules. Once for regular income tax and one for the alternative tax.
So, an individual must first calculate their regular income tax and then calculate their Alternative Minimum Tax. We compare the two numbers, and you pay the higher number. Think of the Alternative Minimum Tax as a floor. This is the least amount of tax we can pay.
Since AMT has completely separate rules it has added complexity to our already complex system.
This tax potentially will affect tens of millions of Americans in 2010. This is because its key provision, the exemption amount, has not been indexed to inflation. When Ronald Reagan “overhauled” the tax code in 1986, Congress did not have the foresight to index this amount and the the major changes of the Tax Reform Act of 1986 magnified this problem.
Congress has increased the exemption amount, or “patched the AMT” every year since 2001. Congress has patched the AMT so that only 4 million taxpayers have been subject to it the past few years.
At this point, however, the AMT is not patched for 2010. So, unless Congress acts to patch the AMT, rather than only about 4 million Americans being subject to the AMT, more than 26 million will be effected.
We expect Congress to act before the end of 2010 and again patch AMT for 2010. But there is a lot of uncertainty and every one should watch these developments closely.
We also think that Congress needs to put a permanent solution in place to solve this ongoing problem. Unfortunately, we do not expect any changes through the 2011 legislative sessions.
If you have any questions about AMT or its impact on you, please do not hesitate to contact us.