In addition to all of the new potential challenges to the middle class in the coming tax year, the alternative minimum tax (AMT) is also finding its way into the ring. The AMT was originally directed at wealthy individuals, but it is increasingly an issue for middle class Americans, including those in Maryland. It can apply to a trust or estate as well as to certain taxpayer incomes.
Although the AMT has been around in one form or another for some time, many Americans are not familiar with it. It is a special way of calculating taxes on higher-income individuals. It reduces exemptions and deductions on income. People making more than a certain amount use the AMT scale to calculate taxes and the regular scale. They then are required to pay the higher tax amount of the two figures.
The AMT has been around since 1969, and was targeted at families with higher incomes. There are complex details involving when it applies and what it applies to, but it mostly applies to individuals with substantial income, above $175,000 or more. When the law was enacted in the 1960s $175,000 was a huge income.
For some reason, Congress did not make the AMT automatically adjust for inflation. As a result, incomes have gone up but the AMT applies to the same financial numbers as it did in the 1960s. This makes a lot more individuals eligible for the tax, including a good number of people who are considered to be middle class. Since the tax would apply not only to income but also trusts and estates, the impact could be quite pronounced.
The fiscal cliff comes in where Congress is expected to enact a patch to fix the way the tax is applied. If Congress enacts the patch, many Americans will continue to pay taxes on their income or an existing trust the way they always have. If the patch is not negotiated, many people in Maryland and throughout the US will take on this new tax structure and some will have a higher tax bill. When looking to handle trusts and estates, people should be sure to consider these issues along with good advice about how to best protect their interests.
Source: Dow Jones Adviser, "Advisers See Fix for Alternative-Minimum Tax," Arden Dale, Dec. 21, 2012