Playing the Odds with the Alternative Minimum Tax 

The almost annual decision about the Alternative Minimum Tax (AMT) is back. In December 2010, Congress and the current Administration gave us a two year extension on the “AMT Patch,” but that only included tax years 2010 and 2011. The Tax Policy Center estimates that without intervention, the number of American households impacted by the Alternative Minimum Tax will leap from 5 million in 2011 to nearly 30 million in 2012.

What is the AMT? The AMT is simply a parallel tax system created to make sure that individuals pay some minimum amount of taxes, even with lots of itemized deductions. One way the system achieves this is by not allowing certain itemized deductions under the AMT calculation.

Since 2006, Congress twice passed a patch during the lame duck session in December following elections, and we fully expect it to do so again this year. But even if they do, that doesn’t mean you’ll be safe from the AMT – it really depends on your tax situation. Here are two scenarios I’ve encountered with my own clients.

Patch? What Patch?

Greg and Samantha are two working spouses, whose kids are fresh out of school. Together they earn about $300,000 a year, and live in a nice area in Maryland. As I was going through their tax projections recently, I realized that because their property taxes, state income taxes, and miscellaneous itemized deductions are so high, they’ll be exposed to the AMT even with a congressional AMT patch.

That may be the case with you, as well. If you’re subject to the AMT – regardless of whether Congress intervenes or not – you should not pay any so-called “AMT adjustment items” before the end of the year (since you will not get the benefit in 2012). However, you could get the benefit in 2013, depending on what Congress does with the income tax reform currently being discussed. In other words, if you know that you will not receive the benefit of a deduction in 2012, delay the expense until 2013, and maybe you’ll receive it at that time.

But what AMT adjustment items can be delayed? There are two very common ones: state and local income taxes and miscellaneous itemized deductions.

While we’re past the third quarter estimated tax payments, you can still cease state withholdings and/or make a 4th quarter estimated tax payment to your state after the end of the year to try for a 2013 tax deduction (but make your payment by January 15th to avoid a penalty for underpayment of income taxes due!).

Hoping for the Patch

Obviously, there are a lot of families who are hoping for a congressional patch so they can avoid the AMT. If you happen to be one of them, you have two options right now. The first is simply to continue as if you will not be subject to the AMT, trusting that because Congress has always stepped in and passed the patch, they will do so again.

Your other option is to follow a similar strategy to that described in the first scenario: Stop withholding state income taxes from your paychecks now and wait to see if Congress passes the patch (which should be clear by the 2nd week of December). If Congress does act, then you can send an estimated tax check to your state Department of Revenue prior to December 31st and claim the state income tax deduction on your 2012 tax return.

 DISCLAIMER: While your Pinnacle Wealth Manager can help you better understand your tax planning opportunities, we recommend that you work with your accountant to finalize your decision. The Alternative Minimum Tax is difficult to understand and plan for, and most consumer software programs are not going to manage the intricacies appropriately. In addition, you can’t simply mail a check to your Department of Revenue and expect them to know what to do with it. You need to mail it with an estimated tax voucher that your accountant will be able to help you prepare. Additionally, there may be other tax planning opportunities at the end of this year that your accountant or your Pinnacle Wealth Manager can bring to your attention.

(Most) Increases Announced for 2013

Most tax breaks and benefits that are affected by annual increases through the Federal government have been announced during the course of the last week.  A quick breakdown of some of the more regular items follows: 

 

      1)      The 401(k) contribution limit has been increased by $500 to $17,500 from $17,000.  However, the catch up for those over age 50 still $5,500.  With that being said the maximum contribution for individuals over age 50 will increase to $23,000 in 2013 due to the increase in the base contribution level to $17,500.    

  

      2)      Contributions to individual retirement accounts (both Roth IRA and traditional IRAs) have increased to $5,500 from $5,000.  However, the catch up for those over age 50 is still $1,000.  So the maximum contribution for individuals over age 50 to an IRA is $6,500. 

   

      3)      The Roth IRA contribution limit has been increased again this year.  Individuals who file as married filing jointly who earn less than $178,000 can contribute to a Roth IRA (this is an increase from $173,000 in 2012).  Individuals who earn less than $112,000 can contribute the full amount as well before phase-outs kick in (the 2012 limit for individuals is $110,000). 

  

      4)      Social Security benefits for those already receiving them will increase by 1.7% in 2013. It is widely expected that the increase in Social Security benefits will be mostly offset by the increase in the cost of Medicare Part B premiums.   These premiums are expected to increase by $7 from $99.90 to $106.90 for couples with adjusted gross income (AGI) under $170,000 and for individual with AGI under $85,000.  However, the increase for Medicare Part B premiums has not yet been announced. 

      5)      In addition, the Social Security wage base was increased to $113,700 from $110,100.  In other words, the first $113,700 of employment income will be subject to Social Security taxes.  That tax is 4.2% for employees today and is subject to revert to 6.2% in 2013. 

      

      6)      The annual gift tax exclusion amount has been increased from $13,000 to $14,000.  This has been adjusting higher since the beginning of the last decade.  It was $10,000 as recently as 2001 and had been stuck at $13,000 since 2009.  Couples can double the amount if they elect to split the gift – meaning they can gift $28,000 to an individual without having to file a gift tax return.