When Washington struck its tax deal early this month, most of the headlines focused on income-tax rates.
But the new law includes several important changes, and one of the most notable has to do with the Alternative Minimum Tax (AMT). The AMT is designed to prevent wealthy taxpayers from using write-offs to avoiding paying their fair share.
But until this year, the tax had not been indexed to inflation, which put more and more ordinary (read: not rich) taxpayers in its path each year. For more than a decade starting in 2001, Congress scrambled annually to protect middle-class individuals and families from the tax that was never meant to apply to them. This yearly AMT “patch” amounted to a last-minute reprieve, and the ritual wasn’t good for anyone’s peace of mind.
Thankfully, the American Tax Relief Act of 2012 has made this patch permanent: The annual exemption that’s at the center of how the AMT is calculated will now rise automatically with inflation. That means you’re less likely to slip into AMT territory just because of inflation.
The AMT fix applies to the 2012 tax year, which is good news for many taxpayers. The Tax Relief Act increased the previous exemption to $50,600 for individuals and $78,750 for couples. Had Congress not acted, the 2012 exemptions would have reverted to the 1993 levels of $33,750 for individuals and $45,000 for married couples filing jointly. And more than 30 million middle-income taxpayers would have been subject to the AMT, a huge increase from 4 million in 2011.
The Tax Relief Act’s AMT provisions weren’t as kind to higher-income Americans, however. Many will likely remain subject to the AMT because they’ll lose certain tax breaks. For instance, mortgage-interest deductions will now be capped for individuals with income levels above $250,000 and couples with income about $300,000.
Should the AMT influence your investing approach? For most of us, avoiding the AMT should not be a top investment goal. That being said, it is possible in some cases to minimize your exposure to the AMT. One example: Spreading out capital gains from the sale of securities or the exercise of stock options over several years.
Whether you’re subject to the AMT or not, Congress’ permanent fix at the very least has created certainty about what to expect each year. And certainty of any sort makes financial planning just a bit easier.
