Alternative Minimum Tax (AMT) Patch in 2009 Recovery Act

The Alternative Minimum Tax (AMT), which began back in 1969, is a parallel tax system that was created to make sure taxpayers in the highest tax brackets weren't able to skip through the tax system. But because of a lack of adjustment over the years, this tax now reaches far deeper than the 155 individuals it was targeted at back in 1969. It is estimated that if changes are not made, it will expose 30 million taxpaers in 2010. Instead of comprehensively dealing with this, it appears we are now stuck in a year-to-year patch that doesn't really address the overall issue of the AMT.

So, what is it? The Alternative Minimum Tax is a tentative minimum tax for the year over the regular tax for the year. In arriving at the tentative minimum tax, an individual begins with taxable income, modifies it with various adjustments and preferences, and then subtracts an exemption amount (which phases out at higher income levels). The result is alternative minimum taxable income (AMTI), which is subject to an AMT tax rate of 26% or 28%. The Alternative Minimum Tax (AMT) is the amount by which the tentative minimum tax exceeds the regular income tax.

In 2008, the AMT patch passed last year created an exemption of $46,200 for unmarried individuals; $69,950 for married couples filing jointly and surviving spouses; and $34,975 for marrieds filing separately. The Recovery Act of 2009 being considered no will "patch" AMT for another year (otherwise the AMT exemption amounts would decrease to much lower year 2000 levels). The Recovery Act makes no change in the AMT phaseout rules.

So for 2009, the AMT exemption amounts for individuals are: married individuals filing jointly and surviving spouses, $70,950, less 25% of alternative minimum taxable income (AMTI) exceeding $150,000 with zero exemption being reached when AMTI is $433,800; unmarried individuals, $46,700, less 25% of AMTI exceeding $112,500 (zero exemption when AMTI is $299,300); and married individuals filing separately, $35,475 less 25% of AMTI exceeding $75,000 (zero exemption when AMTI is $216,900).

Absent any permanent fix by Congress, the 2010 AMT exemption amounts for taxpayers will revert to the levels they were at for 2000. The one-year Recovery Act AMT “patch” has the effect of postponing, for yet another one year period, the exemption reductions that were scheduled to go into effect for 2009. Unless something substantial is done, 30,000,000 taxpayers and nearly every married couple making more than $75,000 will find themselves subject to the AMT in 2010. This sure is a far cry from the original intent of capturing 151 individuals who made over $200,000 in 1969 - the inflation-adjusted equivalent of $1,157,629 in 2008.