About four million unlucky taxpayers will discover that they
must pay the alternative minimum tax when they file their 2011 tax
returns next year. For most, it can be a nasty surprise, wiping out
crucial deductions and exemptions they normally claim, resulting in
a bigger tax bill.
12 Year-End Tax Moves to Make Now
But if you knew in advance that you might be subject to the AMT,
you could make some smart year-end tax-planning decisions to
mitigate the damage. We've created a
to help you figure out if you might be an AMT victim.
The AMT is a parallel tax system created more than 40 years ago
to prevent excessive use of tax breaks by the very wealthy,
ensuring they paid at least some tax. But because it was never
indexed for inflation, the AMT has morphed from a "class tax" into
a "mass tax", affecting millions of middle-class Americans each
year. The number of taxpayers owing the AMT grew from about 20,000
in 1970 to about four million in 2011, according to the nonpartisan
Tax Policy Center.
The AMT does not allow deductions for state and local taxes,
home-equity loan interest (unless the borrowed money was used for
home improvements), or tax and investment expenses -- write-offs
that save money in the regular tax world. Nor does it allow
personal exemptions -- worth $3,700 this year -- for yourself, your
spouse and each of your dependent children. Consequently, taxpayers
with large families or those who live in high-tax states, such as
California and New York, are more likely to find themselves subject
to the stealth tax.
Normally, if you pay quarterly estimated state income taxes or
have a real estate tax bill due in January, you can prepay it in
December and boost your deductions on your 2011 federal tax return
due next spring. But if you're subject to the AMT, this
sooner-rather-than-later strategy won't work for you.
Beyond denying such write-offs for taxes, the AMT also puts the
squeeze on deductions for medical expenses. In the regular tax
world, medical costs in excess of 7.5% of adjusted gross income can
be deducted. In AMT-land, the threshold is 10% of AGI. (The AMT
does, however, permit tax deductions for charitable contributions,
so you can go ahead and make your usual year-end donations.)
The top AMT rate is 28%, well below the 35% at which the regular
tax maxes out. But because more income can be taxed by the AMT, you
could wind up with a bigger tax bill. In fact, you only owe the AMT
when it costs you more than the regular tax.
Although the AMT exemption is not indexed for inflation, in
recent years Congress has protected millions of taxpayers by
passing temporary patches to raise the level, usually one year at a
time. Taxpayers whose income exceeds the AMT exemption must
calculate both regular tax and AMT liability and pay the larger
amount. For 2011, the AMT exemption is $48,450 for individuals and
$74,450 for married couples filing jointly.
But unless Congress acts, exemption levels will drop to $22,500
for individuals and $45,000 for married couples filing jointly in
2012, exposing 31 million taxpayers to the AMT next year, according
to Tax Policy Center estimates.
That means virtually 100% of married couples with incomes
between $50,000 and $475,000 -- even those who claim the standard
deduction -- would be subject to the AMT next year unless exemption
levels are raised, says Michael Kitces. Kitces is the director of
research for the Pinnacle Advisory Group, in Columbia, Md., and
developed the data that serves as the basis of our AMT calculator.
Single taxpayers are threatened, too. Without another patch, almost
all single taxpayers with income between $150,000 to $300,000 will
be subject to the AMT in 2012.
So check out our calculator
before you decide to pay state income or real estate taxes in
December that you could put off until January. If it looks like
you'll be an AMT victim, don't bother.