We haven't heard about this for a while because of the 2 year Bush era tax extensions that occurred in 2009, but AMT concerns are back. What's AMT? Alternative Minimum Tax. Find that confusing? You are not alone! Many of us in the tax profession find it a complication that doesn't make sense anymore.
Why is it an issue in 2012? AMT is a "overlay" tax system. Meaning, once you calculate your regular tax return, then you calculate Alternative Minimum Tax. The original purpose a long time ago was to make sure the "rich" were paying their fair share of taxes. But what happens now is families making anywhere between $100k and $250k in the bay area, end up being subject to AMT. Unfortunately, if you have a family, that's what you need to survive in the Bay Area--that doesn't mean you are rich by any stretch of the imagination! So its a real problem--the purpose of the system is not being realized and the law needs to be changed. A typical family may find that the difference between regular tax and AMT tax could be as much as $7k (or more!) Yes, thats $7k more in tax in 2012 even if nothing significantly changed in your life from 2011. This is a simple shift in the law back to "old" rules. But the unfortunate reality is that its the current law.
Historically, congress has implemented a change at the end of each year so that AMT doesn't revert like that to "old" rules and the $7k additional tax basically disappears. But its an election year. And everyone knows that election years can be unpredictable. So in the meantime, the law says that families in the Bay Area might owe this additional tax......but then history tells us that congress will move at the last minute to change it....but maybe they will, maybe they won't. Its a mess.
Here is why we are nervous about this: If you aren't prepared for the possible additional tax hit and the law isn't changed, then come April 15th of 2013 (or before) you'll have a nasty surprise. Most families don't have this extra $7k around to give to the government....so we need to be aware of this uncertainty in the tax law.
What can you do about it? When you are having your taxes prepared, do make sure you estimate what your 2012 tax burden will be. By doing that you will be using your own facts and circumstances and you can find out if you might have this problem. If you do find that you are in the AMT "sweet spot", then you can plan for this uncertainty with the benefit of most of 2012 ahead of you.
Best to be informed than surprised! We'll be looking at this for our clients this year for sure. If you need help with your taxes, we are here to help.