The Tax Cuts and Jobs Act (TCJA) didn’t eliminate the individual alternative minimum tax (AMT). But the law did draw a silver lining around it. Revised rules now lessen the likelihood that many taxpayers will owe substantial taxes under the AMT for 2018 through 2025. (more…)
Posts tagged ‘alternative minimum tax’
Newly released data from the IRS reveals an increase in adjusted gross incomes, the number of taxpayers paying alternative minimum tax (AMT) and more. The data, posted in the Spring 2014 Statistics of Income Bulletin, comes from 2011, the most recent year for which statistics are available, the IRS reported.
Approximately 145 million individual income tax returns were filed in 2011. Overall, adjusted gross income for all taxable returns was $7.7 trillion, reflecting an increase of approximately six percent from 2010. The IRS reported that the top one percent of returns had an adjusted gross incomes of $388,900 or more and accounted for 18.7 percent of total adjusted gross income for 2011. Total income tax paid for 2011 exceeded $1 trillion.
Taxpayers claimed $73.6 billion in tax credits in 2011. This represented a decrease of 35.2 percent from the $113.6 billion of credits claimed in 2010, due to the expiration of the Making Work Pay Credit, the IRS explained. The IRS also reported an increase in noncash contributions to charitable organizations. More than 22 million taxpayers reported a total of $43.6 billion in deductions for noncash charitable contributions.
For 2011, the IRS reported that AMT liability increased 11 percent to $30.5 billion from $27.5 billion in 2010. The number of returns paying AMT increased by 0.2 million. Alternative minimum taxable income (AMTI) for all returns filing Form 6251 increased 12.6 percent to $2.3 trillion from 2010. Since 2001, the number of returns paying AMT more than tripled from 1.1 million to 4.2 million for 2011, the IRS reported.
As required by the Tax Reform Act of 1976, the IRS reported statistics relating to that the number of 2011 returns with expanded-income over $200,000. Expanded income is AGI plus many deductions, credits, and exclusions that would not otherwise be factored into AGI, such as tax-exempt interest, nontaxable Social Security benefits, foreign-earned income exclusion, and certain miscellaneous itemized deductions. The number of expanded-income returns increased by 9.4 percent to 4.8 million for 2011.
As 2013 draws closer, news reports about “taxmageddon” and “taxpocalypse,” describing expiration of the Bush-era tax cuts, are proliferating. Many taxpayers are asking what they can do to prepare. The answer is to prepare early. September may seem too early to be discussing year-end tax planning, but the uncertainty over the Bush-era tax cuts, incentives for businesses, and much more, requires proactive strategizing. Ultimately, the fate of these tax incentives will be resolved; until then, taxpayers need to be flexible in their year-end tax planning.
In less than three months, the individual income tax rates are scheduled without further action to automatically increase across-the-board, with the highest rate jumping from 35 percent to 39.6 percent. Additionally, the current tax-favorable capital gains and dividends tax rates are scheduled to expire. Higher income taxpayers will also be subject to revived limitations on itemized deductions and their personal exemptions. The child tax credit, one of the most popular incentives in the tax code, will be cut in half. Millions of taxpayers are predicted to be liable for the alternative minimum tax (AMT) because of expiration of the AMT “patch.” Countless other incentives for individuals will either disappear or be substantially reduced after 2012.
In July, the House and Senate passed competing bills to extend many of these expiring incentives one more year (through 2013). No further action is expected on these bills until after the November elections. However, they do signal a highly probable temporary solution to the fate of the Bush-era tax cuts. Regardless of which party wins the White House and Congress, the probability of a one-year extension of the Bush-era tax cuts appears high.
Along with expiration of the Bush-era tax cuts, the two percent payroll tax holiday for 2012 is scheduled to expire. For individuals with income at or above the Social Security wage base for 2012 ($110,100), the payroll tax holiday represented a $2,202 savings. Unlike the Bush-era tax cuts, an extension of the payroll tax holiday is unlikely.
Putting aside the Bush-era tax cuts and the payroll tax holiday for a moment, two new taxes are scheduled to take effect after 2012: an additional 0.9 percent Medicare tax on wages and self-employment income and a 3.8 percent Medicare contribution tax on unearned income. Both new taxes are targeted to individuals with incomes over $200,000 (families with incomes over $250,000). One important misconception about the 3.8 percent Medicare tax is that it is a direct real estate tax. Taxpayers that dispose of real estate may be exempt from the tax either because of income limitations or because of an exclusion provided for primary residence home sales. However, certain high-end homes may feel the sting of the 3.8 percent tax on some or all of the gain realized. Despite some rumblings in the GOP-controlled House, it is unlikely the new Medicare taxes will be repealed before 2013.
All these provisions can be seen as the perfect storm. Year-end tax planning takes on new urgency because of the uncertainty. Some variations on traditional year-end planning techniques may be valuable. Instead of shifting income into a future year, taxpayers may want to recognize income in 2012, when lower tax rates are available, rather than shift income to 2013. The same strategy may apply to recognizing income from capital gains and dividends. Another valuable year-end strategy is to “run the numbers” for regular tax liability and AMT liability. Taxpayers may want to explore if certain deductions should be more evenly divided between 2012 and 2013, and which deductions may qualify, or will not be as valuable, for AMT purposes. Additionally, keep in mind the new Medicare taxes and how they will impact investments and possibly home sales.
Estate tax planning is also in flux. Under current law, the maximum estate tax rate is 35 percent with an applicable exclusion amount of $5 million (indexed for inflation) for decedents dying before January 1, 2013. Unless Congress acts, the estate tax will revert to its less generous pre-2001 rates. Gift and generation-skipping transfer (GST) taxes also will revert to their pre-2001 rates.
Businesses are also confronted with uncertainty in tax planning as 2012 ends. Special incentives, such as bonus depreciation, enhanced Code Sec. 179 expensing and a host of business tax extenders, may be unavailable after 2012.
Under current law, 50-percent bonus depreciation applies to qualified property acquired and placed in service after December 31, 2011 and before January 1, 2013 (January 1, 2014 for certain property). For tax years beginning in 2012, the Code Sec, 179 expensing dollar limitation is $139,000 and the investment ceiling is $560,000 for tax years beginning in 2012. After 2012, 50-percent bonus depreciation is scheduled to expire (except for certain property) and the Code Sec. 179 expensing dollar limitation will drop to $25,000 with a $200,000 investment ceiling.
Enhanced Code Sec. 179 expensing is a good candidate for extension after 2012, but at less generous amounts. In July, the Senate approved a Code Sec. 179 dollar amount of $250,000 and an $800,000 investment limitation for tax years beginning after December 31, 2012. The House approved a Code Sec. 179 dollar amount of $100,000 and a $400,000 investment limitation after 2012.
The list of expired business tax extenders is long. The expired incentives include the research tax credit, special expensing for film and television productions, the employer wage credit for military reservists, and many more. A host of related energy incentives have also expired and are awaiting renewal. Unlike past years, Congress is not expected to routinely extend all of the expired provisions. The more widely utilized incentives are likely to be extended; some lesser used incentives may not.
Businesses do have some good news in year-end planning. Temporary “repair” regulations issued in late 2011 include a valuable de minimis rule, which could enable taxpayers to expense otherwise capitalized tangible property. Qualified taxpayers may claim a current deduction for the cost of acquiring items of relatively low-cost property, including materials and supplies, if specific requirements are met. The aggregate cost which may be expensed annually under a taxpayer’s expensing policy is subject to a ceiling equal to the greater of 0.1 percent of gross receipts or two percent of total depreciation and amortization reported on the financial statement.
Businesses should also explore the Code Sec. 199 domestic production activities deduction. This deduction, unlike many other incentives, is permanent and will not expire after 2012. The deduction allows qualified taxpayers to deduct an amount equal to the lesser of a phased-in percentage of taxable income (adjusted gross income for individuals) or qualified production activities income. A taxpayer’s Code Sec. 199 deduction cannot exceed one-half (50 percent) of the W-2 wages paid by the taxpayer during the year.
The fate of the Bush-era tax cuts and the other incentives is linked to sequestration. The Budget Control Act of 2011 imposes across-the-board spending cuts starting in 2013. Many lawmakers want to postpone or repeal the spending cuts but savings must be recouped somehow. Several energy tax incentives, especially for oil and gas producers, have been viewed as likely candidates for elimination to offset repeal of the Budget Control Act.
Please contact our office at (908) 725-4414 if you have any questions about the incentives we discussed and how you can develop a year-end tax plan that responds to the current climate of uncertainty.
The IRS’s latest Statistics of Income Bulletin (Winter 2011), just released in April, reveals a significant drop in taxable income, reflecting the economic slowdown. The IRS also reported a drop in alternative minimum tax (AMT) revenue.
Income. The IRS reported that adjusted gross income (AGI) fell 6.3 percent from tax year 2008 to tax year 2009. Taxable income decreased 9.3 percent, total income tax fell 15.4 percent and total tax liability decreased 15 percent. The largest component of AGI, salaries and wages, declined 3.7 percent from tax year 2008 to tax year 2009. The second largest component of AGI, taxable pension and annuities, increased 3.1 percent from tax year 2008 to tax year 2009. Statistics for the 2010 tax year will not be available until the IRS gathers and then releases the data from returns just filed for the April 18, 2011 filing deadline.
AMT. For the first time since 2001, revenue collected from the AMT decreased. The IRS reported that AMT revenue fell 9.1 percent to $20.2 billion for tax year 2009.
Credits. Among all tax credits, the IRS reported that residential energy credits experienced the greatest percentage increase. The $1,500 tax credit for home-efficient improvements, including installation of certified heating/air conditioning units, however, expired on December 31, 2010. A maximum $500 credit nevertheless remains available for 2011.
Comment. Despite the drop in income due to the economy, the IRS audit rates did not also drop. Statistics for the IRS indicate that, while slightly fewer returns were filed and revenue collection dropped overall in FY 2010 (Sept 2009 through August 2010) as compared to the 2007-2009 period, audit rates remained fairly constant.