Monday, November 05, 2012

AMT ("alternative income tax") could hit seniors with relatively modest incomes hard for 2012 unless congress restores higher "exemption" amount

The Alternative Minimum Tax affect ordinary retirees this year (2012) heavily unless Congress acts by the end of the year to raise the inflation adjusted exemption amount. In 2011 this had been $48450 for singles (because of annual increases) but it would drop back to $33750 (for singles), unless Congress acts.   That table appears near the end of the Wikipedia article, here

The alternative tax is based on line 38 of the 1040 for people who do not itemize, which is likely to be true of many seniors.  The personal  exemption and standard deduction are not allowed.

The federal form IRS 6251 for calculating it is here 

A critical point  (for retirees) seems to be that social security income is still counted the way it is for the regular tax, because the “85% rule and over” rule applies before reaching line 38 (it’s line 20 on the 10410). 

Charitable deductions could still be taken out for seniors who itemize deductions, but most home mortgage interest would not (generally speaking).  Here's a typical explanation of the charitable giving issue (which occurs by "omission" on the 6251), link.  (It looks to me right now that it works only if you originally itemized deductions, after all.) Pass-thrus from unsettled estates (form K) are added in, also.
It sounds conceivable that a particular person could give enough to charity to make it worth itemizing to avoid the AMT.  Or it may be possible to keep the income within the trust and do the charitable contributions from it, putting the AMT issue (including itemization) on a separate return (for the trust).  That is what I do now (because of the way my trust and my mother’s will were written).  At this time, the issue seems murky and I cannot say definitely further what is allowable without consulting again with my regular tax preparor.

I had previously thought (as has some commentators) that the tax liability can have a discontinuity jump if the Line 38 1040 amount goes over a lower amount.  This does not seem true, as if you follow through Part II of the 6251 and then lines 44-45 of the 1040, you can find the "interpolation".  Still, the tax is steep and for 2012 would not be in line with other tax rates.  Most seniors would not have an issue  if Congress keeps the amount at $48450 or increases it during the lame duck session. There seems to a lot of confusion (even among tax preparers) as to what really will happen if Congress fails to fix the 2012 amounts.  

The other big hit for many people would be the end of the FICA-tax holiday.  This would affect retirees who earn income from regular wage jobs or who have real self-employment and who generate income from work, not investments.  That might hit the self-employed harder.

HR Block has a link on the tax here

The Finance Buff has a page showing some arcane analysis on how the “Obamacare” Medicare tax of 3.8% interacts with the AMT, and issue that could spoil trouble for the president Tuesday of the GOP jumps on it enough today, link here. 

Lori Montgomery has a front page article on the AMT Monday morning Nov. 6 in the Washington Post, “Middle class faces quick impact from fiscal cliff in form of alternative minimum tax”, link here

The AMT rules could provide very perverse incentives for some seniors not to work part-time when they otherwise would, because they could be penalized big time for having adjusted gross that reaches the exemption threshhold.  Congress must fix this problem.  It is a gross, self-inflicted public policy blunder with major economic consequences.  

Here is an hour long webinar by FI360 on the “fiscal cliff”.

These two issues (FICA and AMT) are things Congress needs to address during the lame duck session. They may affect most people a lot more than who wins the presidential election tomorrow. 

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