President Obama has recently proposed a $447 billion jobs bill designed to reduce America’s high unemployment rate. The cost of the bill is to be paid through higher taxes on the nation’s wealthiest taxpayers. The future of this bill is questionable. But a large tax increase that affects a lot of middle income Americans is right around the corner.
Beginning on January 1, 2012, the Alternative Minimum Tax (AMT) will revert to the pre-2003 level that threatens to impact taxpayers with incomes below $100,000. The AMT was created in 1969 to assure taxpayers with the highest incomes paid a minimum amount of tax. Those income levels were never indexed to inflation which has caused more and more taxpayers to be affected as wages increase. The Clinton Administration raised the top AMT rate to 28% in 1993 drawing even more taxpayers into the AMT. In an effort to provide some taxpayers relief, the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) increased individual AMT exemption amounts but only for two years. Ever since then, Congress has an annual debate regarding extension of AMT relief which has often taken until December to resolve.
Three months from now the AMT will reset creating a $137 billion tax increase. Reducing AMT starts by planning to lower your adjusted gross income for 2012. Accelerate income into 2011 if possible. Increase contributions to your retirement accounts and use tax efficient stock funds to minimize dividends. Itemized deductions don’t always help because the AMT excludes them. Medical expenses and charitable contributions are the only two deductions that are not affected. Smart planning involves making adjustments that don’t end up costing money unnecessarily to potentially save taxes. AMT relief could be extended like it has been for the last 6 years. Unfortunately we will probably have to wait until after the Presidential election to know.