ATRA Fix for Alternative Minimum Tax

January 3, 2013

The American Taxpayer Relief Act of 2012 (“ATRA”) permanently fixes the alternative minimum tax, or AMT, indexing it for inflation and preventing it from disallowing certain personal credits. The practical effect of this fix is to maintain, and permanently preserve, the status quo. It means the impact of the AMT in future years will be essentially the same as it has been in the past.

How it works

The most important piece is an adjustment in a special deduction called the AMT exemption amount. For 2012, this figure is set at $78,750 for joint filers and $50,600 for others. Automatic inflation adjustments will apply in later years. Other dollar amounts associated with the AMT (the level where the 26% rate changes to the 28% rate, and the level where the AMT exemption amount begins to be phased out) are not altered for 2012 but will be adjusted for inflation in later years. In addition, the temporary (but perpetual) rule permitting the use of nonrefundable personal credits against AMT has been made permanent.

Impact on taxpayers

Technically this fix prevents the AMT from expanding its reach to tens of millions of additional taxpayers. Realistically, it’s unlikely that Congress ever would have allowed that to happen, so the immediate impact on taxpayers is simply to confirm and make permanent previous tax policy.

We can anticipate one change under this law, however. AMT is calculated in comparison to regular income tax. The regular income tax is going up for high-income taxpayers, and as a result, fewer of those taxpayers will pay AMT.

Impact on politics

Although everyone in Congress agreed on the need to fix the AMT, a series of temporary fixes known as the AMT patch had become a recurring source of partisan bickering over how to handle the revenue impact. This measure won’t bring peace on earth, or even in Congress, but a permanent fix clears away one of the stumbling blocks in the way of sensible tax and budget policy.

Incredible budget impact

Although the AMT fix merely preserves the status quo, for those who follow tax legislation and budget politics this is a stunning development. The need for this measure has been apparent to everyone for many years, but Congress has been unable to deal with the budget implications of a permanent fix and instead has enacted an AMT patch every year or two. How big is the budget impact of a permanent fix? Over the next ten years, this single provision in ATRA is estimated to cost the federal treasury over $1.8 trillion dollars. Not a typo.

Refundable AMT credit expires

As expected, Congress allowed the refundable AMT credit to expire. This provision for claiming AMT credit that remained unused for more than three years won’t be available after 2012. Beginning in 2013, only the regular (nonrefundable) version of the AMT credit will be available — even if you paid AMT during the years when the refundable credit existed.