The Alternative Minimum TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. 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 surtaxA surtax is an additional tax levied on top of an already existing business or individual tax and can have a flat or progressive rate structure. Surtaxes are typically enacted to fund a specific program or initiative, whereas revenue from broader-based taxes, like the individual income tax, typically cover a multitude of programs and services. 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 bracketsA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. 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 inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. 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 |
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|
Legislation |
Exemption Level (Single/Joint) |
Applies to Tax Years |
Signed into Law |
|
$33,750/$45,000 |
1993- |
August 10th, 1993 |
|
|
$35,750/$49,000 |
2001, 2002, 2003, 2004 |
June 7th, 2001 |
|
|
$40,250/$58,000 |
2003, 2004 |
May 28th, 2003 |
|
|
$40,250/$58,000 |
2005 |
October 4th, 2004 |
|
|
$42,500/$62,550 |
2006 |
May 17th, 2006 |
|
|
$44,350/$66,250 |
2007 |
December 26th, 2007 |
|
|
$46,200/$69,950 |
2008 |
October 3rd, 2008 |
|
|
$46,700/$70,950 |
2009 |
February 17th, 2009 |
|
|
Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 |
$47,450/$72,450 – 2010 |
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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