The “fiscal cliff” deal will help millions of Americans avoid paying the dreaded alternative minimum tax-while making it harder for many upper-middle class taxpayers to escape it, analysts say.
The reason is that the minimum income levels subject to the AMT are going up, but wealthier Americans won’t be able to take as many deductions as before. (Read more: Your Taxes Going Up)
The fiscal cliff deal does two things: it permanently adjusts AMT income exemption levels to inflation while giving lower-income taxpayers bigger exemptions and new credits to take them out of the AMT.
For instance, the AMT exemption for 2012 has been raised to $50,600 for singles, up from $33,750, and $78,750 for married couples, up from $45,000. That will keep millions of lower-income Americans from paying the tax.
“The big winners in this are those in the $45,000 to $105,000 income range,” said Bob Phillips, CFP, Managing Principal at Spectrum Management Group. “They can now use credits like the child credit, dependent care credit and the life time education credit in their calculations to lower their income and keep them out of AMT tax brackets.”
The losers are higher-income Americans, who will likely continue to be hit by the AMT because they won’t get the same tax breaks from the deal, said Leon C. LaBrecque, senior financial advisor and CEO at LJPR, LLC.
Among the tax breaks lost for higher incomes are itemized deductions for mortgage interest. Those will now be capped for individuals making more than $250,000 and couples making more than $300,000.
“For those in the $450,000 income level they’re getting hit the hardest by the AMT because they are not part of those being able to use any of those deductions that lower income levels are now getting,” said LaBrecque.
Created in 1969, the AMT is basically a parallel tax that has excluded certain deductions-like state and local income taxes that help lower income levels and taxes-for people making a certain amount of money each year. That means taxpayers in AMT brackets have had to figure out which tax is more, the AMT or regular taxes - and then pay the higher amount. Read the rest of this entry »