The alternative minimum tax (AMT) has received a lot of press over the past few months. The AMT was originally enacted as an alternate tax system to ensure that higher-income taxpayers with large deductions, credits, or “preferences” pay a minimum amount of tax. However, over the years, the AMT has also affected many middle-income taxpayers. A major reason: The AMT tax brackets and exemptions have not kept pace with inflation.

So, in recent years, many people who were never supposed to be taxed under the AMT have been caught in its net. To provide some relief, prior tax legislation had temporarily increased the AMT exemption amounts available to individuals. But that relief expired after 2006. So, for 2007 and beyond, the “old” exemption amounts applied — meaning many more middle-income taxpayers were now exposed to the AMT.

New Legislation

Late in December 2007, Congress passed the Tax Increase Prevention Act of 2007, which restored and increased the temporary AMT exemptions. Below is a table showing the exemption amounts for 2006, what they were scheduled to be in 2007, and what the new law raised them to for 2007.

 

Exemption amounts are phased out when AMT income exceeds certain levels, depending on filing status.

However, this “patch” is not permanent. It applies only for one year. So, the AMT exemptions are scheduled to return to the “old” levels (e.g., $33,750 for unmarried filers) for 2008 and beyond.

In addition, the new law extended through 2007 another expired AMT provision that allows those claiming certain personal tax credits (e.g., the dependent care credit and the HOPE Scholarship and Lifetime Learning Credits) to use them to offset both regular tax and AMT. So, a taxpayer may claim the eligible tax credits up to the amount of the regular income tax plus AMT.

We’re Here to Help

While the new law gives taxpayers a reprieve, figuring the alternative minimum tax remains tricky. Our firm can help you determine if you are subject to AMT. Contact us today.