Q&A with David Greenwell
Alternative Minimum Tax changes provide taxpayers some stability
Q: Each year since 2001, Congress has scurried around at the last minute passing an amendment to the rules for determining the amount of the Alternative Minimum Tax (AMT) exemption an individual can utilize in determining his total tax liability. With the passage of The American Tax Relief Act of 2012 (passed in 2013) the AMT exemption, as increased for inflation, has been made permanent. What would have been the impact if this legislation had not been passed?
A: The total amount of taxes paid by individuals who are subject to AMT would have increased by as much as $10,000 or more for 2012. In addition, failure to pass this legislation would have increased the number of individuals who potentially would be subject to AMT by as many as 60 million taxpayers.
Q: Remind us about what AMT is and when it started.
A: The tax was enacted in 1969 to ensure the then-155 richest Americans couldn't avoid paying some tax. It requires people with higher incomes and more tax deductions to give up some deductions, including dependents, real estate taxes and state and local income taxes. Today, some 4 million taxpayers are subject to the tax, including half of filers who earn $75,000 to $100,000, and 81 percent of those who earn between $100,000 and $200,000.
Q: So now that the annual increase in the AMT exemption for inflation has been made permanent will taxpayers be able to plan better for AMT in the future?
A: Yes, the need to prepare estimates with and without the “patch” will no longer have to be performed by accountants as long as the current system stays in the tax code. However, there is a significant amount of support on both sides of the aisle to eliminate the AMT. President Obama has previously proposed to replace part of the AMT with the “Buffett Rule” as part of comprehensive tax reform. This proposed rule would ensure that taxpayers making more than $1 million would pay an effective tax rate of at least 30 percent.
Q: Are there any changes included in the legislation that will impact individuals in 2013?
A: Perhaps the change that most closely aligns itself with the AMT is the Pease Limitation on itemized deductions for higher-income taxpayers. For married couples with $300,000 or more of adjusted gross income (AGI), they will see their itemized deductions reduced by 3 percent of the amount their AGI exceeds $300,000. However, the amount of itemized deductions cannot be reduced by more than 80 percent as a result of this rule. Similar rules also will limit the benefit of the personal exemption beginning in 2013.
Q: Were business provisions excluded from this tax legislation?
A: No, businesses actually came out the winner as their tax rates were kept intact and their ability to expense additions to equipment and other fixed assets were increased for 2012 and 2013. The legislation increased the Section 179 expense limitation from $139,000 to $500,000 for 2012 and 2013. In addition, 50 percent bonus depreciation for new depreciable assets with recovery periods of 20 years or less was extended through 2013. These types of accelerated depreciation methods are not considered preference items for purposes of AMT calculation for businesses.
PAULA BURKES, BUSINESS WRITER