Annual Inflation Adjustment for the Alternative Minimum Tax

Written by: Christy Rakoczy

The alternative minimum tax, or AMT, was originally created in 1969 in order to make sure that wealthy Americans were not able to escape their tax liability. As a result of loopholes and tax deductions, many wealthy Americans were paying little or nothing on their taxes. The AMT established an alternative calculation that reduced the value of certain deductions to ensure that they had to pay something. Unfortunately, the alternative minimum tax was not indexed to inflation. As a result, more and more families found themselves subject to an additional tax obligation as a result of the alternative minimum tax (AMT). Many of these families were middle class families.

Lawmakers were conflicted on how to address this problem. Republicans generally want to repeal the AMT entirely so that no one is subject to this additional tax and loss of deductions. Most Democrats, however, are not in favor of what is seen as a de facto tax cut for the rich, which is how they view the AMT. So, instead of dealing with the problem once-and-for-all, lawmakers simply adjusted the amount of income subject to the AMT every year. This worked for a long time until relations between democrats and republicans broke down in Washington, D.C. and the two parties were unable to agree on anything. Everything came to a head with an event called the “Fiscal Cliff,” which was a series of automatic spending cuts and tax increases that were scheduled to go into effect on the 31st of December 2012. No adjustment for the AMT had been made by this time for 2012 and lawmakers needed to deal with the AMT as part of the fiscal cliff negotiations to ensure that millions of American families did not get his with a huge surprise tax bill.

The AMT and the Fiscal Cliff

According to the agreement reached to resolve the Fiscal Cliff on January 1, the AMT exemption for 2012 was raised to $50,600 for singles. This was an increase from the $33,750 exemption that would have existed if the agreement had not been reached. For married couples, the exemption was bumped up from $45,000 to $78,750. This change is likely to save the most money for those who make between $45,000 and $105,000 since those below this income level wouldn’t have been subject to the AMT and those above it are likely to still be hit by the AMT.

The AMT was also permanently indexed to inflation as a part of the deal. This means that lawmakers will no longer have to try to agree each year on raising the AMT level and there is no danger that middle class taxpayers will get caught in a game of political brinksmanship that has become far too common in Washington, D.C. and that could have resulted in these middle class Americans facing a huge tax increase because of an outdated tax that was never meant to apply to them in the first place.


Annual Inflation Adjustment for the Alternative...

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