With the fiscal cliff looming, the pressure is on for the federal government to take measures to prevent key tax increases in 2013 (see tax changes that passed with the Fiscal Cliff Deal). One of the most significant tax changes involves the Alternative Minimum Tax or AMT, which up until now most taxpayers have been able to avoid. In a letter issued to the House Ways and Means Committee, Acting IRS Commissioner Steven T. Miller warns that without immediate action, millions of taxpayers could be affected by the AMT next year.
What is the Alternative Minimum Tax?
The Alternative Minimum Tax is a separately calculated tax that expands the amount of taxable income by eliminating or reducing certain exclusions, deductions, and tax credits. The purpose of the AMT is to increase the tax liability of certain taxpayers who may be able to take advantage of loopholes in order to reduce their taxable income. Historically, the AMT was meant to target wealthy taxpayers. In recent years, middle-income taxpayers have been getting hit with the tax in higher numbers because the AMT exemption amounts haven’t been indexed for inflation. Congress has approved temporary patches, which increase the amount of income that’s exempt from the AMT but a similar plan has yet to be approved for 2013.
Who May Be Affected
For the 2011 tax year, the AMT exemption amount was $48,450 for individual filers and $74,450 for married couples filing jointly. This translated to roughly four million taxpayers who paid AMT for the 2011 tax year. For 2012, the exemption limits are significantly reduced to $33,750 for individual taxpayers and $45,000 for married taxpayers who file jointly. According to the IRS, this means that approximately 33 million households would be subject to the Alternative Minimum Tax for the 2012 tax year. Unless a new patch is enacted, affected families could find their tax bill increasing by more than $2,000 on average. This means that taxpayers who normally expect a refund could end up owing the IRS money instead.
Impact on Tax Filings
In addition to increasing tax bills for millions of taxpayers, the AMT could affect the timing of tax return processing in 2013. According to Deputy Commissioner Miller, the IRS would need to reprogram its computer systems in order to accommodate the expansion of the AMT. This means that families who are subject to the AMT would need to delay their tax filings and taxpayers could be waiting longer to get their tax refunds. Even if Congress is able to agree upon a patch for 2013 to avoid the potential tax hit associated with the AMT, the IRS says that tax filing may still be delayed for some taxpayers.
The Bottom Line
The expansion of the Alternative Minimum Tax is just one of several significant changes expected to take effect in 2013 if the Bush-era tax cuts are allowed to expire. Unless the current tax issues are addressed, millions of families could be feeling the financial pitch within the next few months. If you’re concerned that you may be affected by the AMT, it’s a good idea to start planning your tax filing strategy now to minimize its potential impact.