At Long Last, a Permanent Patch for a Dreaded Tax

The Alternative Minimum Tax has threatened the middle class for decades. Now it won't. Score one for the fiscal-cliff deal.

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Andrew Harnik / The Washington Times / Landov

A tax meant only for the wealthy but that paralyzed much of the middle class for decades has been permanently defanged. Score one, at least, for the 11th-hour fiscal-cliff deal.

The dreaded Alternative Minimum Tax hasn’t gone away. But this law, which has been modified 19 times since 1969, will need no more patches. Like Social Security benefits, the AMT is now indexed to inflation. That means the income threshold for being subject to the AMT will rise automatically each year. If you don’t pay it this year, you won’t pay it next year or any year thereafter — at least not without an income boost that outstrips inflation.

“The certainty this creates is extremely helpful,” says Walter Primoff, director of the professional adviser group at Altfest Personal Wealth Management. It will save millions of households from the headache of preparing for two separate tax liabilities.

(MORE: Despite Deal, Taxes Rise for Most Americans)

Among those who will benefit the most are the self-employed, who must pay estimated taxes four times a year and are subject to penalties for underpayment. It’s also great news for households on the AMT bubble: the permanent patch makes it simpler to shift income and deductions in a way that may let them avoid the AMT every other year.

The AMT has always been targeted at the wealthy who through deductions ended up paying little or no tax. It is a parallel tax calculation that disallows certain exemptions and then assesses a lower marginal income tax rate. Taxpayers in the gray zone must figure their bill the traditional way and the AMT way and pay the higher amount.

To keep the tax trained on the wealthy, taxpayers are allowed an AMT exemption, which decades ago was set at $45,000 — high enough to miss the middle class. But this level was not indexed to inflation, so as median incomes grew in the ensuing years, the threshold hit more and more ordinary households and was threatening to hit more each year. Only through congressional action — virtually every year in recent years — has the exemption been lifted to spare the middle class.

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For 2012, the patch lifted the exemption to $78,750 for households and $50,600 for individuals. For the first time, the patch was also indexed to inflation, meaning taxpayers will never again face the uncertainty of a Congress that may or may not take action and possibly subject them to this higher tax.

“Far from perfect, this legislation does include a permanent fix to the ever-growing AMT, giving millions of hard-working, middle-class families certainty that the nightmare of this tax has finally come to an end,” Republican Senator Orrin Hatch of Utah told ABC News.

According to one GOP estimate, 28 million families would have had to pay an average of $3,400 in extra taxes this year without the AMT fix. About 4 million taxpayers owed the AMT in 2011, up from about 1.3 million in 2001, according to the Tax Policy Center.

13 comments
JeanetteUlrich-Baigert
JeanetteUlrich-Baigert

I, like the others, cannot believe that 78k is considered wealthy! Additionally, I cannot believe this is stated in the article without any notation as to how outrageous and erroneous this "fact" is.

Mark_Stewart
Mark_Stewart

Last Wednesday, Chief Operating Officer of DevonshireCWM Sally Johnson said Japan is acting to weaken its currency and there is a danger that others will follow suit and foster a round of destabilizing devaluations.

Drew Doemling
Drew Doemling

Allen, I understand what this is. However, what I am saying is that the average middle class tax payer just uses Turbo Tax which decides (recommends) the best avenue to take to get the biggest rebate back possible! This article doesn't speak to your average middle class tax payer who makes up 98% of Time's readership (my estimation)...

Allen Haugh
Allen Haugh

Drew, what it's saying is that if you fit under the tax's definition of wealthy, you would have to pay either this tax or normal income tax, whichever one is higher. The problem is that the tax's definition of wealthy was set a few decades back, when today's average income would qualify as wealthy. This means that middle-class people would be classified as wealthy and taxed at the higher rate. Instead of raising the definition of wealthy by fighting over it in Congress every year like we have for the past god knows how long, we just make it rise with inflation. Am I clear?

Angel Salinas
Angel Salinas

why do people complain about taxes when they pay taxes? We all know where that money goes to and that's China ot Isreal not on our kids education or healthcare. So Its time to stop feeding the machine; End the Fed!

Tryptan Felle
Tryptan Felle

Perhaps you should read the article. It explains everything.

Drew Doemling
Drew Doemling

Hey Time, I love you guys but you lost me on this one! As a dedicated tax payer of the middle class for 20 years, I have no idea what this article says. Next time, use your middle class translating app and put it in words we can understand!

Bill Butler
Bill Butler

Taxes went up so what are you talking about!

CrushTheLeft
CrushTheLeft

A major victory by the Republicans in protecting the middle class so utterly hated by the democrat party.

DavidClaudeWarlick
DavidClaudeWarlick

This just shows the incredible shrinking middle-class.  The IRS defines the lower class, at least for its VITA Volunteer Income Tax Assistance, as any individual with adjusted income under $50,000.  Now it is defining the wealthy, at least for the AMT, as any individual with modified adjusted income over $50,600.  Is that correct, Dan, that the middle class is now restricted to a $600 range?

snow
snow

This isn't really cause for getting all excited.  The AMT patch in 2011 for couples was $74,450.   78K doesn't exactly fit the descripton of "wealthy" which is what the AMT tax was originally intended for, nor does it take into account cost of living regionally.  In NY it would be just barely keeping your head above water for a family.  

rjsigmund
rjsigmund

watch for the creep if they change to chained CPI for the index..