When Congress and President Obama sparred in December over ending the so-called “fiscal cliff,” the resulting compromise on tax increases and spending cuts was less than satisfying to both Democrats and Republicans.
But hidden deep within the bill approved by lawmakers in the 11th hour and signed by Mr. Obama, was a little ray of sunshine for some taxpayers.
During its marathon bargaining session, Congress finally agreed to permanently fix the annual uncertainty of the Alternative Minimum Tax. The AMT was set up in 1969 and operated like a separate tax system.
Designed to keep the wealthy from using multiple deductions to avoid taxes, the alternative minimum, which uses Form 6251, had been ensnaring more middle-class taxpayers each year because the exemption amounts were not automatically adjusted annually for inflation.
They were adjusted only when Congress passed a “patch” to raise the exemption; since 1969, the tax went through 19 adjustments.
But now the AMT has been indexed to inflation, which means that the income thresholds for those subject to the AMT will change automatically each year.
It also creates certainty, something that has been sorely lacking with the AMT.
“The AMT is still there, but the sting has been lessened,” said Chuck Mira, a partner with the firm of Mira + Kolena. “It adds a lot more certainty.”
According to the Tax Policy Center of the Urban Institute and Brookings Institution, permanently fixing the alternative minimum means that 30 million taxpayers who might have been snared by the AMT for 2012 won’t have to pay it. The higher exemption limits will save those 30 million, plus the 4 million who will pay the AMT, about $85 billion in taxes.