Alternative Minimum Tax Patch Expanded and Made Permanent

The non-corporate alternative minimum tax (AMT) is a tax system that runs parallel to the regular tax system.  It has its own definitions of income and deductions, and has its own exemption and tax rates.  For example, some tax-free municipal interest income (e.g. “private activity” bonds) is taxable, and itemized deductions for taxes and personal exemptions are not deductible.  The AMT has all of the long-term capital gain and qualified dividend tax rates used for regular tax, but it only has two ordinary income tax rates:  26% and 28%.  There is a fairly large exemption amount, but it phases out by 25% of the excess of AMT taxable income over certain threshold amounts.  If the calculated amount of the AMT exceeds the regular tax, then the excess becomes the AMT and is added to the regular tax amount.  Thus, the AMT is really a misnomer because it isn’t an “alternative” to the regular tax, it is mandatory; and it doesn’t “minimize” tax, it maximizes tax.

The AMT was originally enacted to catch 155 rich taxpayers who reportedly paid no income tax in 1966.  Now the AMT catches around 4 million taxpayers in its snare.  The main reasons for the expansion of the AMT are that its tax rate brackets, exemption amounts, and exemption phase-out threshold amounts have not been fully indexed for past inflation.  In addition, regular tax ordinary income tax rates were lowered under the “Bush” tax cuts (now made permanent except at the highest income bracket) while there was no corresponding reduction to the AMT ordinary tax rates.  In the past, Congress enacted temporary “patches” of the exemption amount to reflect recent inflation in order to prevent a wide expansion of the AMT.  For example, the 2012 patch prevents an additional 26 million taxpayers from becoming ensnared by the AMT.

Fortunately, the American Taxpayer Relief Act of 2012 permanently patches the AMT exemption amount for recent inflation, and in a significant change, also expands the patch so that starting in 2013, the exemption phase-out threshold and the 26% ordinary AMT tax bracket will be indexed for future inflation.  The relevant figures are shown in the table below.

	2012 if no Patch	2012 Patch	2013 as Indexed
Exemption, MFJ	$  45,000	$  78,750	$  80,800
Exemption, MFS	$  22,500	$  39,375	$  40,400
Exemption, Single	$  33,750	$  50,600	$  51,900
Exemption, Trust & Estate	$  22,500	$  22,500	$  23,100
Start of Exemption Phase-out, MFJ	$150,000	$150,000	$153,900
Start of Exemption Phase-out, MFS	$  75,000	$  75,000	$  76,950
Start of Exemption Phase-out, Single	$112,500	$112,500	$115,400
Start of Exemption Phase-out, Trust & Estate	$  75,000	$  75,000	$  76,950
Top of 26% rate bracket, MFJ & Single	$175,000	$175,000	$179,500
Top of 26% rate bracket, MFS	$  87,500	$  87,500	$  89,750
Top of 26% rate bracket, Trust & Estate	$175,000	$175,000	$179,500