An Example of What Could Happen if an AMT Patch Isn’t Passed

Update 1/2/13: Mercifully, Congress did indeed pass an AMT patch, and it looks like the patch is permanent this time, so we won’t have to go through this every couple of years. So, this blog post is now a moot point, but makes for an interesting read about what would have happened if we had gone over the “fiscal cliff”.

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Congress will surely pass a “patch” to the alternative minimum tax for 2012 … won’t they? ID-10078737

One would hope so, or a lot of people will get hit with a surprise when they file their tax return.

Here’s an example.

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Setup:

“John and Mary” are a fictional married couple, but their situation is based on a situation one of my clients in real life would face if an AMT patch isn’t passed.

Relevant information:

  • Combined salaries: $77,000
  • They have 1 child
  • They do own a home and make charitable contributions, but they don’t have enough expenses to itemize deductions, so they claim the standard deduction instead.

If an AMT patch is passed, John and Mary won’t owe AMT. If a patch isn’t patched, they WILL owe AMT. (But scroll down to the comment section for a discussion of another option John and Mary may have that would result in them owing more tax but not being subject to AMT.)

Calculation (If AMT Patch is Passed):

  1. $77,000 wages – $11,900 standard deduction – $11,400 personal exemptions ($3,800 x 3)= $53,700 taxable income.
  2. Gross tax owed on $53,700: $7,185
  3. Net tax owed: $6,185 ($7,185 minus $1,000 child tax credit)
  4. Alternative minimum tax calculation: in John and Mary’s case, there are no AMT adjustments to make. Their AMT taxable income (“AMTI”) is their $77,000 gross income minus the $77,000 “patched” AMT exemption (estimated and rounded) = $0 subject to AMT.
  5. AMT doesn’t apply.
  6. John and Mary’s tax owed = $6,185
  7. $6,185 / $77,000 = 8.0%

Calculation (If No AMT Patch):

  1. The first three items above are the same ($7,185 gross tax/$6,185 net tax)
  2. Here’s where the differences kick in. Their AMTI is now $77,000 gross income minus $45,000 “unpatched” AMT exemption = $32,000 AMTI
  3. AMT is essentially a flat tax that imposes a 26% flat rate (or 28% at higher incomes). John and Mary are in the 26% range. $32,000 x .26 = $8,320 gross AMT
  4. $8,320 AMT is $1,135 more than the $7,185 “regular” gross income tax owed, so AMT does apply to John and Mary
  5. Their net tax owed = $7,320 ($8,320 AMT minus $1,000 child tax credit)
  6. $7,320 / $77,000 = 9.5%

So the short version is: John and Mary — a solidly middle class family that doesn’t even itemize deductions — would owe $1,135 more in taxes if Congress doesn’t pass an AMT patch.

According to my calculations, a married couple with income as low as $66,700 would be subject to AMT (just $2 of AMT, but subject to AMT nonetheless).

Image courtesy of www.freedigitalphotos.net.

“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.”