Experts Queasy About AMT Fix

Tax season can be testy for most Americans.

It will doubtless be testier next year if a backbiting Congress can’t hash out its differences.

A startling number of taxpayers are facing an increased income tax rate. The culprit is the alternative minimum tax, the subject of much disagreement and part of the debate over tax reform.

It was created in 1969 and now operates as a parallel tax, requiring taxpayers to calculate their taxes two different ways — the regular tax system allows tax credits and certain expenses, while the AMT system eliminates some deductions and credits — then pay the higher amount.

The intent was to ensure high-income individuals didn’t use shortcuts to get around paying their share of income tax. But the AMT was not set up to adjust for inflation, and an income considered as “very wealthy” in 1969 would not be regarded as such today.

And if lawmakers don’t raise the income level that is automatically exempt from AMT — something they do every one or two years with what is referred to as a patch — the AMT net could catch about 22 million more middle-class taxpayers than last year.

According to The Tax Foundation, as of current law, 27 million taxpayers are set to owe more under the AMT than under the regular income tax. If a patch were passed, the number of taxpayers hit by AMT would be about 5 million.

Brad Roethlisberger is a tax manager and CPA with Beall Barclay & Co. PLC in Rogers. He said calculating the level where AMT starts depends on different factors, such as marital status, number of dependents and the type of income.

It could start affecting middle-class taxpayers making as little as  $33,750 — unless Congress steps up with another patch.

The current exemption is $33,750 for a single and head-of-household filer, and $45,000 for married filing jointly filers.

“Any income that exceeds these exemption levels may be subject to AMT,” he said.

Roethlisberger offered an example of a married couple with three children. AMT, which does not allow an exemption for children, would start at around $60,000 of adjusted gross income.

Roethlisberger fears that because this is an election year, there’s a chance the AMT could be left on the table.

In previous years, Congress put aside partisan politics and passed legislation exempting most middle-class Americans from the effects of the AMT. Lawmakers have yet to address the problem this year, and with Election Day just weeks away, their efforts are focused elsewhere until the lame-duck session begins in mid-November.

“It would surprise the heck out of me if they go in and fix all the things that they’re saying are going to get fixed,” Roethlisberger said. “I’ve lost a lot of faith in terms of them fixing everything they say they’re going to fix.”

The AMT is a key component of the so-called fiscal cliff, the term that has been given to the pending spending cuts and expiring tax breaks set to take effect Jan. 1, aimed at reducing the federal budget deficit.

The result, it is believed, would be another recession if the fiscal cliff were not avoided.

David Vaden, a partner at Ernst & Young LLP in Rogers, said he is keeping his eye on this year’s patch, legislation known as the Family and Business Tax Cut Certainty Act of 2012. It would extend certain expiring tax provisions, including the AMT, through the end of 2013.

According to a report from the Congressional Budget Office, enacting the bill would reduce revenues by about $205 billion over the 2013–2022 period. More than 60 percent of that revenue reduction would arise from a two-year extension of relief from the individual AMT.

“Our hope is that will be passed so that a lot of people won’t be impacted by the widening of the net, if you will,” Vaden said.

He said the legislation would take the cut-off for individual and head of household filers up to about $50,000 and the married filing jointly filers to approximately $78,000.

Tax accountant Chris Doolittle, a senior manager with BKD LLP in Little Rock, said he is hoping for an indication of when lawmakers will address the AMT patch. But like Roethlisberger, he also has doubts of any practical politics post-Election Day.

“In 2012, this is the wild, wild West,” Doolittle said. “It stinks for us as taxpayers. We have no idea. We could get a patch passed on [Dec. 31] for all we know, and it won’t surprise me at all if it’s the last minute.

“But these two parties right now, just … are they going to get along?”