As Congress returns to Capitol Hill post-elections, key bipartisan tax leaders have promised to patch the alternative minimum tax ("AMT") for the 2010 tax year. The AMT operates parallel to the regular income tax to ensure that taxpayers pay at least a minimum amount of the federal income tax. An individual taxpayer is subject to AMT if the taxpayer's tentative minimum tax exceeds regular income tax for the taxable year. In general, the AMT under IRC Section 55 is calculated by (1) increasing the taxpayer's regular taxable income by "tax preference items" and making adjustments for certain deductions permitted under regular income tax, (2) calculating the exemption amount which is subject to phase-out and subtracting this amount from the taxpayer's alternative minimum taxable income ("AMTI"), and (3) applying the two-tiered AMT rate structure of 26% and 28% against the remaining AMTI to ascertain the taxpayer's tentative minimum tax. The taxpayer is liable for the greater of the amount of regular income tax, or the AMT.
Although the AMT provides a basic exemption, the exemption is subject to phase-out at high income levels and has never been indexed for inflation. Congress has addressed legislatively over the years the potential widening impact of the AMT by enacting a "patch" to temporarily increase the exemption amount for a given year. For the 2009 tax year, a one-year patch was passed that increased the AMT exemption to $46,700 for individuals and $70,950 for married taxpayers filing jointly. Without legislation, the AMT exemption for 2010 would return to prior law levels and decrease to $33,750 for individuals and $45,000 for married taxpayers filing jointly. While the AMT has affected approximately 4.5 million taxpayers in 2009, the number could significantly rise to approximately 25.2 million taxpayers in 2010 if Congress fails to pass an AMT patch. See Joint Committee on Taxation, "Present Law and Background Data related to the Federal Tax System in Effect for 2010 and 2011," JCX-19-10 (Mar. 22, 2010).
Understandably, individuals and practitioners have raised growing concerns over the potential impact of the AMT and the resulting difficulty in tax planning. Individual income tax due under current law could be significantly different from the amount due once legislation is enacted. Consequently, taxpayers could be overwithholding on income tax and tax advisors must present their clients with different income tax scenarios, including one based on current law and another on the potential effect once legislation is passed. See Roger Russell, Congress Leaves Tax Pracs in Limbo at webcpa.com. Moreover, the IRS is facing administrative difficulties as it prepares for the upcoming filing season.
Key bipartisan tax leaders have responded to these growing concerns by pledging legislative relief. In a letter to the IRS Commissioner, the lawmakers assure that "Congress is working on legislative relief" and "will work to craft the AMT provision so that, in the aggregate, no one additional taxpayer faces higher taxes in 2010 due to the onerous AMT." The letter further states that "such legislation will allow personal credits against AMT and the exemption amounts for 2010 to be set at $47,450 for individuals and $72,450 for married taxpayers filing jointly." See Press Release: Baucus, Levin, Grassley, Camp Pledge 2010 AMT Relief. The AMT patch, however, does not come without cost. The Joint Committee on Taxation estimates that the AMT patch for the 2010 tax year could result in federal revenue loss of approximately $61.5 billion over ten years. See Joint Committee on Taxation, "Present Law and Background Data related to the Federal Tax System in Effect for 2010 and 2011," JCX-19-10 (Mar. 22, 2010). The Obama Administration's FY2011 Budget proposes a more permanent fix- that is, to index the AMT for inflation. To do so, however, could result in an even greater potential revenue loss of approximately $658.8 billion, and if the Bush tax cuts enacted from 2001 to 2003 are extended, the cost could be over $1.2 trillion. See Congressional Research Service, Alternative Minimum Taxpayers by State: 2007, 2008, and Projections for 2010 (Nov. 8, 2010). AMT relief is popular in Congress and among its constituents and is expected to pass before the year end. Other suggested alternatives, such as indexing for inflation, permitting more AMT deductions, or eliminating the AMT, is up for debate. See Congressional Research Service, "The Alternative Minimum Tax for Individuals" (Nov. 5, 2010). What we know for sure is that the clock is ticking and Congress will have to act quickly to pass the AMT patch before year end.
RELATED LINKS: For more information, see
Lexis Explanation IRC Sec. 55(d)
Lexis Tax Advisor -- Federal Topical § 1K:1.03
1-1 Tax Planning for the Alternative Minimum Tax § 1.03
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