Special Report of Future Tax Changes - AMT

This is a continuation of posts to provide information about income taxes for 2012 and beyond. While what will actually happen is uncertain at this time; however, the potential changes are quite significant to your bank account.

Alternative Minimum Tax

Always a “favorite” of clients. Congress usually enactes so-called AMT “patches.” The patches increased exemption amounts for the growing number of taxpayers subject to the AMT. The patches also allowed nonrefundable personal credits to the full amount of the individual’s regular tax and AMT. The most recent patch, in the 2010 Tax Relief Act, expired after 2011.

Impact

For 2011, the exemption amounts were $48,450 for unmarried individuals filing a single return, and $74,450 for married couples filing a joint return and surviving spouses. Under current law for 2012, the exemption amounts — unless changed by Congress — drop precipitously to $33,750 for unmarried individuals filing a single return, and $45,000 for married couples filing a joint return and surviving spouses.

Impact

The “patch” in the 2010 Tax Relief Act provided that all nonrefundable personal credits are allowed to the full extent of the taxpayer’s regular tax and AMT liability. If a similar patch is not enacted for 2012, only certain nonrefundable credits would be allowed against AMT liability; including (not an exhaustive list) the child tax credit, the American Opportunity Tax Credit (AOTC) and the retirement savings contribution credit (saver’s credit).

Comment: The House GOP has proposed to eliminate the AMT. However, proposals to abolish the AMT have stalled in Congress, largely due to the projected loss of revenue. The AMT is a “cash cow” for the federal government and lawmakers under tight budgetary constraints in the 2011 Budget Control Act are reluctant to eliminate the AMT. However, they are expected to patch the AMT for 2012 and possibly 2013, until a more permanent solution is found. The Joint Committee on Taxation (JCT) has estimated that an AMT patch for 2012 would cost $92 billion over 10 years. This one, along with the marriage penalty, will be interesting to follow due to the large number of people impacted.

Comment: President Obama has proposed to replace at least part of the AMT with the so-called Buffett Rule under comprehensive tax reform. The White House has explained the Buffett Rule in general terms as ensuring that taxpayers making over $1 million annually would pay an effective tax rate of at least 30 percent. In April 2012, the Senate rejected the Paying a Fair Share Act, which would implement the Buffett Rule. Democrats are expected to reintroduce the bill.

Impact of Sunsets – Illustrations

Assume a couple, two children eligible for the child tax credit, filing a joint return and taking the standard deduction, with $130K wage income, $10,000 net capital gains, and $2,000 dividend income. Their tax liability for 2013 (all figures are estimates and, for illustration, assume no inflation adjustments between 2012 and 2013):

• No Sunset: $19,485 tax due for 2013
• Full Sunset: $25,898 tax due for 2013
• Difference: $6,413*

Assume a couple, no children, filing a joint return and taking the standard deduction, with $300K wage income, $50,000 net capital gains, and $5,000 dividend income. Their tax liability for 2013 (assuming for illustration, no inflation adjustments between 2012 and 2013):

• No Sunset: $77,721 tax due for 2013
• Full Sunset: $89,934 tax due for 2013
• Difference: $12,213*

Assume a single filer, no children, taking the standard deduction, with $70K wage income, $5,000 net capital gains, and $1,000 dividend income. The individual’s tax liability for 2011 (assuming for illustration, no inflation adjustments between 2012 and 2013):

• No Sunset: $11,992.50 tax due for 2013
• Full Sunset: $13,606.50 tax due for 2013
• Difference: $1,614*

* Loss of Current 2% Payroll Tax Reduction up to Social Security Wage Base (anticipated to be $113,700 in 2013) not included.

Student Loan Interest Deduction

EGTRRA eliminated a 60-month rule for the $2,500 above-the-line student loan interest deduction and expanded the modified AGI range for phase-out. The 2010 Tax Relief Act extended these enhancements through 2012.

Impact

For 2012, the student loan interest deduction is reduced when modified adjusted gross income exceeds $60,000 for single individuals ($125,000 for married couples filing a joint return) and is completely eliminated when modified adjusted gross income is $75,000 or more for single individuals ($155,000 for married couples filing a joint return). If the enhancements to the deduction sunset after 2012, the deduction would begin to phase out for single individuals whose modified adjusted gross income, estimated with inflation adjustments, exceeds $50,000 ($75,000 for married couples filing a joint return) and would be completely eliminated when modified adjusted gross income is $65,000 or more for single individuals ($90,000 for married couples filing a joint return).

Comment: The student loan interest deduction is taken as an adjustment to income and is available to non-itemizers.