The tax bill passed by Congress on December 17th included another “patch” to the Alternative Minimum Tax (AMT).  Without this patch, an estimated 20% of taxpayers would have been hit with the AMT in 2010.

 The bill sets the following exemption amounts:

 •Married: $72,450 in 2010 and $74,450 in 2011

 •Single and head of household: $47,450 in 2010 and $48,450 in 2011.

The AMT was first enacted in 1969 in an effort to force a small number of wealthy taxpayers (155 to be exact) who were reporting little or no taxable income. Like most aspects of the tax code, the AMT is complex and is hard to explain in a blog post without making your eyes glaze over. Essentially, the AMT is an “alternate” calculation of taxable income in which certain deductions are not allowed and certain items are calculated differently than for “regular” tax calculations. Taxpayers are allowed a certain amount as an AMT exemption (see the amounts above) but ridiculously, the exemption amount is not indexed for inflation. Instead, Congress passes “patches” to the AMT exemption amount year after year that increase the exemption for a year or two at a time.

Unfortunately, even with higher exemption amounts, millions of people (4.5 million in 2009) have been hit with AMT. Without the patches, that number would be even higher. Again, when the law was enacted 40 years ago, it was targeted at 155 high-income people, but now it’s grown into a monster.

Why isn’t the AMT exemption set higher to begin with and indexed for inflation (the “non-patched” base AMT amounts are the same as they were in 1993)? It’s a way to boost revenue projections when lawmakers calculate the “cost” of legislation. For example, the current AMT “patch” is set to expire at the end of 2011. So long-term budget projections will forecast revenue for 2012 and beyond based on the old, lower AMT exemption amounts, even though we all know that Congress will pass another “patch” for those later years.

“This blog post, along with comments that may follow, should not be considered tax advice. Before you make final tax or financial decisions, please secure a professional tax advisor to give you advice about your unique situation. To secure Jason as your accountant, please click on the ‘Services’ link at the top of the page.”