2012 Likely to be First Year Without AMT Patch

 
 
December 28, 2012

The Alternative Minimum Tax is a strange beast. Originally designed to ensure that very wealthy taxpayers would be unable to use loopholes and deductions to avoid paying income tax, it has now essentially become a surtax on upper-middle class homeowners with children, while being mostly avoided by the truly wealthy. When Americans go to file this year's taxes, many will get a big surprise, as 2012 is shaping up to be the first year in the modern history of the AMT without a patch - and if that happens, millions of Americans who had never had to worry about the AMT before will suddenly find themselves on the hook for thousands of dollars.

How did we get to this point? To find out, we need to go back to 1986, the last time the tax code was thoroughly overhauled. Congress made the smart decision to index the regular tax brackets for inflation, so that they rise automatically every year - but for whatever reason, they forgot to do so for the AMT. The most important AMT parameter is the exemption level; taxpayers have no taxable income under the AMT until their income exceeds it. In 1986, this was $30,000 for single filers and $40,000 for joint filers.

These levels remained constant until August 10th, 1993 - the day President Clinton signed into law the Omnibus Budget Reconciliation Act of 1993, which included a provision raising the AMT exemption levels to $33,750 for single filers and $45,000 for joint filers. This particular change took effect retroactively; despite being signed into law more than halfway through the year, it applied to the entire 1993 tax year and all subsequent years. Congress then left the AMT alone for several years, during which an increasing number of taxpayers were subject to it due to the lack of automatic inflation adjustments.

The next change to the AMT exemption level was for tax year 2001 as part of the first set of Bush tax cuts, signed into law on June 7, 2001 - it was raised to $35,750 for single filers and $49,000 for joint filers. However, it differed from previous AMT changes in that it was only temporary - the bill explicitly stated that the increased exemption level applied only to tax years 2001, 2002, 2003, and 2004; it would have returned to the 1993-2000 amount in 2005 in the absence of further legislation. Every subsequent AMT "patch" has also been temporary:

Table: Historical AMT Patches

Legislation

Exemption Level (Single/Joint)

Applies to Tax Years

Signed into Law

Omnibus Budget Reconciliation Act of 1993

$33,750/$45,000

1993-

August 10th, 1993

Economic Growth and Tax Relief Reconciliation Act of 2001

$35,750/$49,000

2001, 2002, 2003, 2004

June 7th, 2001

Jobs and Growth Tax Relief Reconciliation Act of 2003

$40,250/$58,000

2003, 2004

May 28th, 2003

Working Families Tax Relief Act of 2004

$40,250/$58,000

2005

October 4th, 2004

Tax Increase Prevention and Reconciliation Act of 2005

$42,500/$62,550

2006

May 17th, 2006

Tax Increase Prevention Act of 2007

$44,350/$66,250

2007

December 26th, 2007

Emergency Economic Stabilization Act of 2008

$46,200/$69,950

2008

October 3rd, 2008

American Recovery and Reinvestment Act of 2009

$46,700/$70,950

2009

February 17th, 2009

Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010

$47,450/$72,450 - 2010
$48,450/$74,450 - 2011

2010, 2011

December 17th, 2010

Notice that 2012 is conspicuously absent from this table - there's no patch (yet), so the AMT exemption level for this year is the same as what it was for 1993-2000 - significantly smaller than it's been in a long time, and certain to cause significant tax increases for millions of taxpayers. The latest AMT patch ever enacted thus far was December 26th (for tax year 2007). Today is the 28th, and there are only three days left in the year, so we're truly in uncharted territory. Congress could, conceivably, do a patch in early January, but it's never been done so late before - the IRS would have to redesign all their tax forms, and it would undoubtedly cause major delays for many filers.

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