More Alternative Minimum Tax Patches

Over the last several years, Congress has elected to solve the increasing number of unintended Alternative Minimum Tax victims by providing temporary one year fixes. The American Recovery and Reinvestment Act of 2009 (“the ACT”) continues this tradition.

The Alternative Minimum Tax (“AMT”) parallels the regular income tax and must be paid to the extent it exceeds one’s regular income tax. Alternative Minimum Taxable Income (AMTI”) is regular taxable income with certain adjustments and increased by tax preferences. Like regular income taxable income, there is an exemption from the AMT.

The AMT exemption for years prior to 2001 was $45,000 for married filing joint filers (including surviving spouses), $33,750 for unmarried individuals, and $22,500 for married filing separately filers. The exemption is phased out by 25% of the excess of AMTI over $150,000 for joint filers, $112,500 for unmarried individuals, and $75,000 for married filing separately filers.

Unlike the regular income tax, neither the AMT exemption, nor the phaseout amounts are increased by inflation. Normally this would cause an unintended annual increase in the number of taxpayers subject to the AMT. Congress has periodically increased the exemption but not the phaseout amounts. For example the AMT exclusions for 2008 are $69,959 for joint filers, $$46,200 for unmarried filers and $34,975 for married filing separately. Without further legislative action, the exemption would return to pre 2001 amounts.

The Act increases the AMT exemptions for 2009 to $70,950 for married filing joint and surviving spouse filers, $46,700 for unmarried filers and $35,475 for married filing separately filers. The phaseout amounts remain unchanged. The AMT exemption for corporations ($40,000) and trusts or estates ($22,5000) also remain unchanged. It is important to note that the increased AMT exemptions are for 2009 only. Without further legislation, the exemptions will return to pre 2001 amounts in 2010 and thereafter.

The ACT also extends for one year the ability to use nonrefundable credits against the AMT. For years prior to 2009, an individual was allowed to offset their AMT by non refundable personal income tax credits, including the dependent care credit, education credits, credit for the elderly and disabled, child and adoption credits, credit for home mortgage interest, retirement savings credit, energy credits, and the D.C. first time homebuyer credit. Before the ACT most non refundable credits would not have been available to reduce the AMT. The ACT extends the prior law to 2009 thus allowing most non refundable personal credits to be used for AMT purposes.

Finally, the Act removes the tax exempt interest on private activity bonds as a tax preference for bonds issued in 2009 and 2010.

The AMT is claiming more victims every year and not necessarily those for whom the tax was intended. It is extremely difficult to calculate especially considering the subsequent year’s credit for AMT paid in a previous year. Proper calculation requires more tax expertise than the average non professional taxpayer can ever possess. While one should always consider using a professional tax preparer in all but the simplest situations, it is almost a necessity to seek professional advice where the AMT is concerned.

The Making Work Pay Tax Credit

The Making Work Pay Credit is perhaps the best known tax provision of the American Recovery and Reinvestment Act of 2009 (the Final Stimulus Plan). This refundable federal income tax credit, available in 2009 and 2010, can be claimed by most individuals with earned income. The credit is 6.2 % of earned income up to a maximum credit of $400 ($800 on a joint return).

This credit is reduced by the amount of any economic recovery payment or government retiree credit received by the taxpayer. In general, $250 payments will be made in 2009 to most adult recipients of certain Social Security, Railroad Retirement, Veterans, and SSI benefits. Also in 2009, certain government retirees will receive a $250 tax credit.

The Making Work Pay Credit is phased out for higher income workers by reducing the amount of the credit by 2% of Modified Adjusted Gross Income (MAGI) exceeding $75,000 ($150,000 for joint filers). The credit is totally phased out when MAGI equals or exceeds $95,000 ($190,000 for joint filers). MAGI is Adjusted Gross Income plus certain foreign source income excluded from a taxpayer’s gross income.

Most individual taxpayers (estates and trusts are not considered individual taxpayers for this purpose) who have a valid social security number are eligible for this credit. A taxpayer identification number issued by IRS does not count as a valid social security number. If a joint return is filed, only 1 spouse needs to have a valid social security number. Non resident aliens and those taxpayers able to be claimed as a dependent on another taxpayer’s return cannot claim the Making Work Pay Credit.

The credit will be made available to taxpayers through reduced federal income tax withholding rather than as a single check from the government. Presumably, this method of delivery will increase consumer spending to a greater extent than the previous method of a single lump sum check.

Tax Provisions of the Final Stimulus Plan

The American Recovery and Reinvestment Act of 2009, commonly referred to as the Final Stimulus Plan, was signed into law on February 17, 2009. While spending is the largest component of the stimulus plan, the Act also contains several important tax provisions. These tax provisions which affect wage earners and the unemployed, home and car buyers, college spenders and small businesses are also designed to increase spending.

The following is a very general overview of some of the major provisions of this tax bill. In the ensuing weeks we will examine these provisions in greater detail.

The “Making Work Pay” refundable tax credit for 2009 and 2010 should affect most taxpayers. The credit is 6.2 % of wages up to $400 ($800 for joint returns). The credit begins to reduce when Adjusted Gross Income reaches $75,000 ($150,000 for joint returns) and is eliminated when such income hits $95,000 ($190,000 for joint returns). Social Security, Railroad Retirement and Veteran’s Administration benefit recipients will receive a minimum credit of $250 regardless of the amount of their wages.

Lower income taxpayers will receive other tax benefits under this bill. Expansion of the Earned Income Credit and liberalization of the Child Credit will hopefully give lower income taxpayers with dependent children more dollars in their pockets. For the first time recipients of unemployment compensation will escape tax on the first $2400 of these benefits.

All taxpayers subject to the controversial alternative minimum tax will see an increase in the exemption from such tax in 2009. The exemption will increase to $46,700 from $33.750 (to $70,950 from $45,000 for joint returns).

The credit for first-time homebuyers is expanded to $8,000 under this bill which also extends and liberalizes the credit. New car buyers will get a deduction for sales tax on the first $49,500 of the cost of a car, motorcycle or mobile home purchased between February 17 and December 31 of 2009. The tax deduction can be taken even if the taxpayer does not itemize, but is phased out for higher income taxpayers.

Taxpayers paying college expenses for either themselves or their dependent children in 2009 and 2010 may benefit from a change in the way tax benefits of such expenditures are calculated. The new “American Opportunity Tax Credit” increase the maximum credit to $2500 and is available for the first four years of post secondary schooling. The income phaseout ranges have also been increased. Forty percent of the credit will be refundable.

Limited tax breaks are also provided for businesses. Since the 1960’s Congress has believed that business owners will purchase more equipment if given appropriate tax incentives. This bill is no exception this theory. Bonus depreciation or the ability to write of 50% of the cost of qualifying property is extended to 2009. The ability of small businesses to completely write of certain capital expenditures in the year of acquisition (section 179) is also extended to 2009. Certain small businesses will also be allowed to carry back losses to five previous years, increased from 2 previous years. There are several other tax benefits provided for in the bill including the expansion of certain business credits.

In succeeding weeks we will examine and explore these tax provisions in greater detail, one provision at a time.