What No AMT Patch Means | Smith, Kunz & Associates

No AMT Patch Means Higher Taxes & Filing in March

December 17, 2014

IRS Warns Congress to Act Now!

There is much debate about the “Fiscal Cliff” (see our other pieces here & here) and the conversations seem to have centered on tax laws affecting tax year 2013 and forward. However, there are still issues from 2012 that Congress has failed to resolve that could delay the 2013 filing season until late March and surprise married filers earning more than $75,000 per year (individuals earning more than $50,0000) with an additional $3,700 in taxes. This is thanks to a little-known part of the tax code which accountants hate and few others understand - the dreaded AMT.

The Alternative Minimum Tax (AMT) was an alternative tax system created in the 1980s as nearly a flat tax on taxable income designed to ensure that high income earners paid their share of taxes. Each year, a taxpayer must pay the greater of the AMT or regular tax. There is an exemption amount that is supposed to shield middle and lower-income households from the AMT. However, the AMT exemption is not indexed for inflation so that over time, the real values decline and the fraction of taxpayers subject to the AMT rises. This is known as fiscal drag or bracket creep. Each year Congress “patches” this problem by increasing the exemption amount.

The last Congressional patch expired December 31, 2011. Absent action by Congress by the end of the year, the exemption amount would revert to 1998 levels subjecting an estimated 28 million more households to the AMT. In addition, the IRS would experience significant delays in preparing their systems and personnel for tax season without an AMT patch. They have estimated that over 60 million households would be unable to file until late March, at the earliest.

The following is an excerpt of a letter from the Commissioner of the IRS, Steven T. Miller, dated November 13, 2012, and addressed to Senator Max Baucus (Chairman of the Committee on Finance):

“The AMT applies to individual taxpayers with incomes above specific thresholds set by law. For many years, Congress has been enacting "patches" to index these income thresholds for inflation in order to prevent millions of taxpayers from being subject to the AMT. The last such patch expired on December 31, 2011.

“More specifically, for tax year 2011, the AMT exemption amount (as indexed for inflation) was $48,450 for individuals and $74,450 for married taxpayers filing jointly. Because of these thresholds, only about 4 million taxpayers paid AMT for tax year 2011. Under current law, however, the thresholds revert to much lower levels for 2012 ($33,750 for individuals and $45,000 for married taxpayers filing jointly). At these levels, approximately 33 million taxpayers would pay AMT for tax year 2012 (with returns filed in the spring of 2013). This is about 28 million more taxpayers who would pay the AMT than if the exemption amounts were increased as in the past.

“In addition, the AMT patch has historically been accompanied by a special tax credit ordering rule that applies to all taxpayers claiming certain tax credits - whether they owe AMT or not. The ordering rules change the order in which a number of popular tax credits are applied against tax liability, and how they may be used to offset both regular and alternative minim um tax.

“Taken together, the changes to the AMT exemption amount and the special tax credit ordering rules could affect more than 60 million taxpayers - nearly half of all individual income tax filers. In addition, the changes to the tax credit ordering rules that result from a lapse in the AMT patch are highly complex and cut deeply into the core tax processing logic of IRS's critical filing season technology systems.

“In prior years - most recently 2007 and 2010 - Congress allowed the AMT patch to lapse for more than 11 months, but then retroactively reinstated it. In both 2007 and 2010, the IRS consulted with Congress and was provided with bipartisan, bicameral assurances that Congress was working expeditiously to enact a patch. The IRS, in turn, made a risk-based decision to leave its systems programmed assuming that Congress would continue its historical practice and again enact extensions of both the increased AMT exemption amount and the special tax credit ordering rules.

“Consistent with past practice, I have instructed IRS staff again this year to leave our core systems "as-is" with respect to the AMT, and hold off on the substantial design and engineering work that would be required in order to revert the core tax systems back to 1998 law (which will otherwise apply for 2012 in the absence of any action by Congress). Therefore, if Congress enacts an AMT patch, including both increased exemption amounts and the special tax credit ordering rules, before the end of the 2012 calendar year, the IRS would likely be able to open the 2013 tax filing season with minimal delays for most taxpayers.

“However, if there is no AMT patch enacted by the end of the year, the IRS would be forced to operate the 2013 tax filing season based on the expiration of the AMT patch. There would be serious repercussions for taxpayers. Without an AMT patch, about 28 million taxpayers would be faced with a very large, unexpected tax liability for the current tax year (2012). In addition, in order to allow time for the IRS to make the programming changes necessary to conform our processing systems to reflect expiration of the AMT patch and the credit ordering rules, the IRS would, at minimum, need to instruct more than 60 million taxpayers that they may not file their tax returns or receive a refund until the IRS completes the necessary systems changes. Because of the magnitude and complexity of the changes, it is entirely possible that these taxpayers would not be able to file until late March 2013, if not even later. Tens of millions of these taxpayers would unexpectedly have to pay additional income tax for 2012, leaving them with a balance due return or a much smaller refund than expected. For millions of other taxpayers, refunds would be delayed.

“Finally, because the AMT patch already expired at the end of 2011, there is no ability to consider partial year extensions of the AMT (since by the end of 2012 it would have already lapsed for an entire year).”

See the full text of the Commissioner’s letter here.

The Tax Policy Center estimates that the average family affected by the failure to patch AMT would see their taxes increase by $3,700. These are families that have probably never dealt with the AMT, and would come as a complete surprise.

Link to a USNews article regarding this issue, as well as the Tax Policy Center estimates.

So, if you earn more than $50,000 (single) or $75,000 (married), refer back to our site for updates on the AMT patch. We hope they fix this problem by year-end. Stay tuned.

For more information on the AMT patch, call Smith, Kunz and Associates at (208) 356-8500. We are happy to answer any questions you have!