In computing the Alternative Minimum Tax, a taxpayer is allowed a particular "exemption amount," similar in idea to the standard deduction and individual exemptions allowed in calculating the Typical Tax. A surprise that hits a good deal of AMT payers, even so, is that this exemption quantity is gradually phased out as a taxpayer's income increases. This "hidden killer" phaseout is among the primary factors folks get caught in the AMT.
The exemption amount
The AMT exemption amount for married taxpayers filing jointly is $72,450 for 2010 and for 2011, and it's set at different levels for other filing statuses (see Form 6251). The exemption amount was when again "patched" within the recently-enacted tax law, effectively indexing the quantity for inflation.
How the exemption works
The exemption can be a subtraction from a taxpayer's Option Minimum Taxable Income (AMTI), prior to the tax itself is calculated. As an example, if a married-filing-jointly taxpayer's AMTI before exemption had been $120,000, after subtracting the exemption this taxpayer would apply the AMT rates only to the net number - in this example, $47,550. It would be extremely unlikely that this taxpayer would pay the AMT following receiving the benefit of the full exemption.
The "hidden killer" phaseout
When the phaseout applies, even so, the exemption quantity becomes smaller, with taxable income thus correspondingly becoming larger. For married taxpayers filing jointly, the phaseout begins at the $150,000 income level, on a "1 to 4" basis. Specifically, for every $4 of further income above this level, the exemption is reduced by $1. Note that, as with the exemption itself, the phaseout begins at different levels for the other filing statuses.
As an example, assume a married couple had AMTI prior to exemption of $160,000. In this case, the exemption would be decreased by $2,500 (1/4 of $10,000). If AMTI were $200,000, the exemption could be reduced by $12,500, and so on until it truly is fully phased out.
No indexing of the phaseout
One of the huge challenges with this hidden killer is that it has by no means been indexed for inflation. The last major rewrite of the tax law was in 1986, when the phaseout level was set at its present levels - $150,000 for marrieds filing jointly. Right now it remains at those 1986 levels, despite the really obvious fact that $150,000 is a significantly far more easily reached income level for married couples right now that it was 25 years ago.
Those who are affected
The IRS' recently-released statistics for the 2009 tax filing season reveal the challenge. At income levels up to $100,000, fewer than 1% of taxpayers are within the AMT. For income levels between $100-200,000, this increases to 6%. Soon after this comes the actual shocker - at the $200,000 level up through $500,000, 70% of the folks in this group are paying the Option Minimum Tax. The hidden killer is one of the most important factors for this.
What this indicates, unfortunately, is that working families who're far removed from the super-rich whose abuses led to the imposition of the AMT over 40 years ago, are extra and a lot more being caught in its trap. President Obama himself refers to an income level of $250,000 to separate the wealthy from the not-so-rich, yet a huge number of people below this level are in reality caught by the AMT.
What may be done
Much of AMT planning focuses on the itemized deduction side of the calculation, but the income side and its corresponding effect on the loss of the AMT exemption also is a important issue in AMT planning. Some examples of tax planning opportunities that have an effect on income levels incorporate the basic question of no matter if or not both spouses must work, no matter if corporate executives will need to defer their bonuses to a future year or exercise their stock selections, or no matter if modest organization owners really should accelerate or defer income. There are numerous others that could apply to any individual taxpayer's scenario. An on line calculator is really a need to in performing any AMT planning.
No comments:
Post a Comment