AMT is the government’s ATM machine

The Alternative Minimum Tax (AMT) was introduced more than 40 years ago to make sure all taxpayers paid some level of tax. Over the years it has come to apply to millions of middle income taxpayers, generating billions in federal tax revenue.

AMT is a separate tax system, with different treatments of income and deductions as well as a different tax rate. It is calculated and compared with the regular tax, and the taxpayer pays the higher of the two.

What is unusual with AMT is its complexity and that it does not allow some common deductions that are permitted for the regular tax.

For instance, state income tax and property tax are not allowed as deductions for AMT. Thus, taxpayers who reside in higher tax states (like Wisconsin) are more likely to incur an AMT liability than taxpayers living in lower tax states. In addition, the dependent exemption available for children is not allowed for AMT. Thus, a large family is more susceptible to the AMT just because of its size.

This chart highlights some of the differences with AMT:

DeductionRegular tax treatmentAMT treatment
Medical costsAllowed (w/limits)Allowed (w/limits)
Mortgage interestAllowedAllowed
Property taxAllowedDisallowed
State income taxAllowedDisallowed
Unreimbursed business expenseAllowedDisallowed
Personal exemptionsAllowedDisallowed

The AMT exemption for 2009 was $70,950 for a married couple and $46,700 for a single taxpayer. Unless Congress acts, the AMT exemption is set at $45,000 for 2010 for a married couple and $33,750 for a single taxpayer. This drop in the AMT exemption would dramatically increase the number of AMT taxpayers, and those already subject to AMT would see their AMT increase further. The number of AMT taxpayers could double or triple. If the AMT exemption stays at $45,000 for 2010 and is not increased by Congress, a married couple (with no children) with a combined income of $75,000 and claiming the “standard deduction” would find themselves subject to AMT in 2010.

At some point this fall (whether in the September or November session), Congress is likely to consider raising the AMT exemption.

While this matter has received little attention, I expect that Congress will patch the AMT exemption for 2010 to similar levels as 2009.

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