Created in 1969, the Alternative Minimum Tax, or AMT, was intended to compel wealthy tax dodges to pay their fair share of taxes. Primarily, it imposed a minimum tax on people who received the bulk of their income from dividends.
The problem with the AMT, according to planner Jeff Fishman, founder of JSF Financial Planning in Los Angeles, is that it was never adjusted for inflation and, over the years, has begun to ensnare many more people than originally intended. And when that happens, he said, taxpayers suddenly lose their ability to take many substantial deductions – such as mortgage interest deductions – that they had been counting on.
In recent years, the federal government has created an AMT “patch” to help exempt millions of Americans from getting caught, he said. But no such patch has been created for 2012 yet.
“If there is a patch (the AMT) will snare 4 million-plus people,” Fishman said. “If there isn’t, it could be 30 million. The numbers are staggering.”
Even with a patch in place, Fishman said, he keeps CPAs on speed dial to keep close tabs on any of his clients to anticipate whether they may become subject to the AMT even for 2011. Making the determination is not a simple matter, he said, although it’s largely based on an individual’s itemized deductions as a ratio to their total income.
He offered a Los Angeles-centric example of a screenwriter who falls under the AMT in a year where his income joint income with a spouse is $250,000.
“Because of (their) itemized deduction of state income and property tax,” he said, “They fall under AMT. It’s a formula.” And now, he said, many of their deductions will be disallowed.
However, if Fishman knows that, after a script sale, the screenwriter stands to make $750,000 in the following year, his deductions as a percent of his income would drop, pushing him out of the AMT danger zone.
In which case, Fishman urges such clients to defer as many deductions as possible until the next year. For example, that may mean postponing the second annual payment of a property tax bill. The same goes for state income taxes – deductible when a taxpayer isn’t subject to the AMT – if they can be pushed into the next year.
“How the AMT impacts people really depends year after year. It’s always on the legislative agenda,” Fishman said. “For our clients AMT is definitely an issue.”
Ann Marsh writes for Financial Planning.
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