AMT Adjustment for 2007
By now you probably saw in the news that Congress passed an AMT "Patch"
for 2007. You may be asking: What does that really mean to me and my taxes?
Practically speaking, if you were not subject to the Alternate Minimum Tax
last year, and your situation has changed very little, then you are unlikely
to be hit by that tax this year.
Conversely, if you paid AMT last year, and there was little change in your
tax situation compared to 2006, then you will probably have to pay it again.
For those hoping that Congress would finally deal with AMT in a way that
eliminates this problem once and for all, you should be disappointed.
All that Congress did was to repeat what has happened for the last several years,
and that is to apply a 1-year patch to postpone the problem.
More precisely, Congress simply adjusted the standard AMT deduction to allow
about 25 million US taxpayers to escape this tax for another year. This limits
the political fallout as it limits the number of people personally affected.
How does the AMT work?
Briefly and simply the AMT tax system is an alternate method of calculating
our income tax. Each year we are requried to calculate our income tax liability
in two very different ways and then to pay the higher amount.
The AMT system applies both itemized deductions and its own standard deduction.
(This is highly simplified, and minimized for the majority of taxpayers.)
Here is how the process effectively works:
- Begin with your Adjusted Gross Income, calculated just like in the regular tax system.
- Subtract unreimbursed medical expenses that exceed 10% of your AGI. (The regular tax
system allows for these expenses in excess of 7.5% of your AGI.)
- Subtract deductible interest expense.
- Subtract deductible contributions.
- Subtract a standard deduction based on your filing status.
The AMT system refers to this as an exemption.
- Multiple the remaining amount by 26%, or for very high incomes, 28%
(less an offset that causes the tax rate to be 26% for the first amount of income).
That amount is your AMT tax. Notice what was not included above:
- Personal exemptions for each family member.
- Taxes paid, whether state income tax, property taxes, sales taxes, or other taxes.
- Miscelaneous deductions (normally subject to the 2% hurdle) that includes job or employee expenses.
These items are not deductible for AMT. This can make tax planning very difficult.
So what did Congress do? They increased, for one year, that standard deduction or "exemption"
amount that is subtracted off. It now ranges from just over $30,000 for singles or those
filing separate although married, to over $60,000 for those filing a joint return with their spouse.
The goal of this is to move the income range high enough that most people will not be
caught in this tax system. The change allows about 25 million taxpayers to escape.
History of the AMT
The AMT was established at the end of the 1960s to prevent those with the highest income
from totally avoiding income tax. It caught about 159 taxpayers, who made more than about $50,000
each year. That was a lot of money in the 1960s, when a loaf of bread cost less than a quarter.
The problem is that the law was not written to adjust the threshold amount as incomes
increased. Today, for most parts of the country, having an annual income of $50,000 or
more each year does not make you exceedingly wealthy.
In some areas, that is fairly low middle-class income levels.
But that is where the AMT starts to hit taxpayers, unless the income thresholds are
increased, which is what Congress does each year.