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While the alternative minimum tax (AMT) initially was implemented to prevent wealthy Americans from claiming so many tax breaks that they owed little or no tax, it has steadily hit more middle and upper middle class taxpayers. About 4 million taxpayers paid the AMT in 2012, nearly double the approximately 2.1 million that did in 2002, according to the Tax Policy Center.

Even though Congress has made some AMT changes beginning in 2013, you might still be at risk.

Many Possible Triggers

The AMT is a separate tax system that doesn’t allow certain deductions and income exclusions. Items treated differently that can trigger the tax include:

  • State and local income and property taxes,
  • Interest on home equity debt not used to improve your principal residence,
  • Certain miscellaneous itemized deductions (such as professional fees, investment expenses and unreimbursed employee business expenses),
  • Medical expenses (for taxpayers age 65 and older),
  • Tax-exempt interest on certain private activity municipal bonds, and
  • Incentive stock option exercises.

The AMT rates are lower than the top regular tax rates — 26% and 28% compared to 35% and 39.6% — but the AMT rates often apply to a larger income base. You must calculate your tax under both systems and pay the higher amount.

An exemption has protected many taxpayers from the AMT. But the exemption is phased out for higher-income taxpayers.

The Power of the Patch

Unlike the regular tax system, where tax brackets, personal exemptions and many other breaks are automatically adjusted for inflation annually, the AMT system historically required congressional action for such adjustments, referred to as “patches.” This meant there was always the threat that Congress would fail to act, causing millions more taxpayers to become subject to the AMT.

Congress has now made the patch permanent by requiring the AMT brackets, exemptions and exemption phaseouts to be annually indexed based on the 2012 levels. For 2013, the exemptions are $51,900 for singles and heads of households and $80,800 for joint filers, with phaseout ranges of $115,400–$323,000 and $153,900–$477,100, respectively.

The Right Strategy

You may be at risk if multiple triggers apply to your situation (especially large dollar amounts) and your income significantly exceeds the exemption (especially if your exemption will be phased out). But strategies are available for minimizing AMT liability or even taking advantage of the AMT’s lower rates. For additional information on our estate & trust services, please contact Jordon Rosen, CPA, AEP, at 302.225.0600 or click here to email Jordon.  In a brief consultation he can assess your situation and determine the best way to proceed.