David Lerner Associates: Tax Law Patches the AMT Permanently

David Lerner Associates: Tax Law Patches the AMT Permanently

Core Facts

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When the American Taxpayer Relief Act (ATRA) passed on New Year’s Day, averting a tumble over the so-called “fiscal cliff,” much of the media attention was focused on the law’s tax increase on high-income individuals and couples. ATRA adds a new top marginal tax rate of 39.6 percent that hits individuals making more than $400,000 per year or married couples filing jointly who make more than $450,000 per year.

In addition, the payroll tax holiday that was in effect for 2011 and 2012 was not extended for 2013. As a result, most workers’ take-home pay is now lower than it was at the end of 2012.

But there are many other provisions of ATRA that are actually good news for many taxpayers. One of these is its permanent fix of the Alternative Minimum Tax, or AMT. If Congress had not taken action, more than 30 million Americans could have been subject to the AMT this year — and seen an average tax increase of $4,000.

A Little History

The AMT was originally established by Congress in 1969 in order to try to make sure that high-income individuals who were using tax credits and deductions to eliminate their tax liability at least paid some amount of federal income tax. Since then, the AMT has evolved into a parallel tax system with separate rules for determining income and deductions and separate exemption amounts.

However, the provisions of the AMT — and the exemption amounts, in particular — were not indexed for inflation. As a result, an increasing number of ordinary taxpayers were captured by the AMT and had to pay the higher AMT tax amounts. The only thing that kept tens of millions more Americans from being ensnared by the AMT was annual “patches” passed by Congress that raised the exemption amount on a year-to-year basis.

ATRA includes provisions that automatically raise the exemption amounts every year to adjust for inflation. Therefore, experts say, the AMT should hit approximately the same number of people this year that it did last year (around four million taxpayers). The AMT exemption amount this year is $50,600 for single filers, or $78,750 for married couples filing jointly.

Not a Cure All

Despite the patch, the AMT still has its share of vocal critics. One of the biggest criticisms of the AMT is the fact that it disproportionately affects taxpayers who live in areas with high state and local income and property taxes. This is because state and local taxes are not deductible under the AMT tax system, but they are deductible under the regular tax system. As a result, middle-income taxpayers who live in these areas are more likely to be impacted by the AMT than individuals with similar incomes who live in lower-tax cities and states.

Purchasers of tax-free municipal bonds should also be aware of the fact that, in certain circumstances, muni bonds could be subject to federal tax if the bondholder is subject to the AMT. An example of this type of muni bond is one that is used for a municipal improvement that is backed by the credit of a corporation, not of a state or municipality.

“It’s important to work with your accountant to determine whether or not you are subject to the AMT,” says David Lerner Associates Vice President of Trading Doug Revello. “You should also be aware of the AMT status of your investment when purchasing individual tax-free municipal bonds and municipal bond funds.”

Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by
David Lerner Associates,Inc. (DLA). This material does not constitute an offer or recommendation to buy or sell securities and should not be considering in connection with the purchase or sale of securities. Member FINRA & SIPC.


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Founded in 1976, David Lerner Associates is a privately-held broker/dealer with headquarters in Syosset, New York and branch offices in Westport, CT; Boca Raton, FL; Teaneck and Princeton, NJ; and White Plains, NY. For more information contact David Lerner Associates 1 877 367 5960 http://www.davidlerner.com

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Jake Mendlinger
Account Manager
516.829.8374 X 232

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