Get ready to start paying higher taxes—$3,900 to $8,000 more a year on average. Unless Congress acts, some 30 million Americans will have to pay the dreaded Alternative Minimum Tax (AMT), whose rates, depending on your income, are either 26 percent or 28 percent.
According to the Congressional Budget Office, "Nearly every married taxpayer with income between $100,000 and $500,000 will owe some alternative tax."
Like many awful things, the AMT is the result of good intentions.
It was created by Congress in the 1960s to help ensure that even the most tax-savvy rich paid some minimum amount. Congress, however, did not index its definition of "rich" to inflation. The result is that an income that qualified you as rich 30 years ago subjects you to the AMT—or would, if Congress didn't authorize, every year, a "patch"—a specified amount of money a filer can deduct from his adjusted gross to stay below the AMT's threshold.
If Congress failed to approve a new patch, the permissible amount for married couples filing jointly would fall, for example, from the current $74,450 to $45,000. "A lot more people would start paying a lot more money," says Andrew Schwartz, founder of Schwartz & Schwartz, P.C., a CPA firm specializing in the tax and financial planning issues applicable to young professionals.
Right now uncertainty over when and whether Congress will approve a new patch makes tax planning difficult, he says. "For seven or eight years now," he explains, "Congress has been passing these one or two-year patches, rather than make a more permanent fix." According to him, tax planning software now in use assumes the worst: That Congress won't act.
If no new patch were approved, says Barbara Weltman, a tax and business attorney and author of J.K. Lasser's Tax Deduction for Small Business, 20 million to 30 million taxpayers not previously subject to the AMT would have to pay it.
The likelihood that you'll be hit, says Schwartz, increases if you:
-Have a large family
-Have high real estate taxes and/or high state and local income taxes
-Claim significant miscellaneous itemized deductions
-Exercise and hold incentive stock options
-Realize significant long-term capital gains
Figuring out if the AMT applies to you isn't easy. You start by going to the IRS' website and using the "AMT Assistant," a tool that will determine if you must file Form 6251, an AMT worksheet.
Persons who fail to make the effort (or who misjudge their eligibility) will have to pay not just the higher tax but penalties and interest as well.
You can reduce AMT exposure by reducing your adjusted gross income. For example, you can increase the contributions you make to your 401(k) or IRA. The self-employed can claim a home office deduction. Persons with substantial portfolio can move money from taxable investments into tax-exempt bonds or bond funds.
"With the AMT," says Schwartz, "It's all about timing." Try to pay, for example, your real estate and state and local income taxes in years where your income falls outside AMT range, he advises.
There are plenty of other tax issues to worry about for 2012.