Understanding taxes is complicated, but here’s a fact that’s easy to understand: Thanks to new rules on the dreaded alternative minimum tax, you may well pay thousands less in taxes this April. Even though taxpayers across the nation have complained about new tax increases cutting their take-home pay, what many don’t realize is that the AMT provisions in the recent tax compromise legislation will save tens of millions of taxpayers from having to pay as much as $8,000 each in additional taxes on their 2012 returns.
How the AMT works
To get some basic information about what the alternative minimum tax is and why you should care, I turned first to our exclusive Motley Fool ONE Tax Center for guidance. Inside, you’ll find out that the revisions to the alternative minimum tax made what’s known as the “AMT Patch” permanent and indexing a key exemption amount to rise automatically with inflation.
The history of the AMT goes back to 1969, when the original purpose was to ensure that high-income taxpayers that had taken advantage of tax credits and deductions that completely eliminated their regular tax liability would pay at least some income tax. The original AMT was based on the value of tax benefits received and generally applied only to top income earners.
Since then, subsequent changes have made the AMT a lot more complicated. Now, the AMT is a parallel tax system, with its own rules for determining income and deductions and its own separate exemption amounts. The main problem with the AMT, though, is that its provisions were never indexed for inflation, and so the AMT laws referred specifically to exemption amounts of $33,750 for single filers and $45,000 for joint filers from 1993 to 2012.
Over that span of time, inflation caused those exemption amounts to capture not just rich people but also an increasing number of ordinary taxpayers. Only special “patches” to raise the exemption amount on a one-year basis kept the AMT from hitting tens of millions of taxpayers, and when the fiscal-cliff debate went over the New Year’s Eve deadline back in January, more than 30 million taxpayers could have had to pay the AMT for the first time, with the average increase expected to be almost $4,000 and with some taxpayers having to pay as much as $8,000 more due to the AMT.