Many people look for help from professionals when it’s time to file their tax return. If you use a paid tax preparer to file your federal income tax return this year, the IRS urges you to choose that preparer carefully. Even if someone else prepares your return, you are legally responsible for what is on it.
Here are ten tips to keep in mind when choosing a tax return preparer:
1. Check the preparer’s qualifications. All paid tax return preparers are required to have a Preparer Tax Identification Number. In addition to making sure they have a PTIN, ask if the preparer belongs to a professional organization and attends continuing education classes.
2. Check on the preparer’s history. Check with the Better Business Bureau to see if the preparer has a questionable history. Also check for any disciplinary actions and for the status of their licenses. For certified public accountants, check with the state boards of accountancy. For attorneys, check with the state bar associations. For enrolled agents, check with the IRS Office of Enrollment.
3. Ask about service fees. Avoid preparers who base their fee on a percentage of your refund or those who claim they can obtain larger refunds than other preparers can. Also, always make sure any refund due is sent to you or deposited into an account in your name. Taxpayers should not deposit their refund into a preparer’s bank account.
4. Ask to e-file your return. Make sure your preparer offers IRS e-file. Any paid preparer who prepares and files more than 10 returns for clients must file the returns electronically, unless the client opts to file a paper return. IRS has safely and securely processed more than one billion individual tax returns since the debut of electronic filing in 1990.
5. Make sure the preparer is accessible. Make sure you will be able to contact the tax preparer after you file your return, even after the April 15 due date. This may be helpful in the event questions arise about your tax return.
6. Provide records and receipts. Reputable preparers will request to see your records and receipts. They will ask you questions to determine your total income and your qualifications for deductions, credits and other items. Do not use a preparer who is willing to e-file your return by using your last pay stub before you receive your Form W-2. This is against IRS e-file rules.
7. Never sign a blank return. Avoid tax preparers that ask you to sign a blank tax form.
8. Review the entire return before signing. Before you sign your tax return, review it and ask questions. Make sure you understand everything and are comfortable with the accuracy of the return before you sign it.
9. Make sure the preparer signs and includes their PTIN. A paid preparer must sign the return and include their PTIN as required by law. The preparer must also give you a copy of the return.
10. Report abusive tax preparers to the IRS. You can report abusive tax preparers and suspected tax fraud to the IRS on Form 14157, Complaint: Tax Return Preparer. If you suspect a return preparer filed or altered a return without your consent, you should also file Form 14157-A, Return Preparer Fraud or Misconduct Affidavit. Download the forms on the IRS.gov website or order them by mail at 800-TAX-FORM (800-829-3676).

Six Important Facts about Dependents and Exemptions

While each individual tax return is unique, there are some tax rules that affect every person who files a federal income tax return. These rules involve dependents and exemptions. The IRS has six important facts about dependents and exemptions that will help you file your 2012 tax return.

1. Exemptions reduce taxable income. There are two types of exemptions: personal exemptions and exemptions for dependents. You can deduct $3,800 for each exemption you claim on your 2012 tax return.
2. Personal exemptions. You usually may claim one exemption for yourself on your tax return. You also can claim one for your spouse if you are married and file a joint return. If you and your spouse file separate returns, you may claim the exemption for your spouse only if he or she had no gross income, is not filing a joint return and was not the dependent of another taxpayer.
3. Exemptions for dependents. Generally, you can claim an exemption for each of your dependents. A dependent is either your qualifying child or qualifying relative. If you are married, you may not claim your spouse as your dependent. You must list the Social Security Number of each dependent you claim on your return. See Publication 501, Exemptions, Standard Deduction, and Filing Information, for information about dependents who do not have Social Security numbers.
4. Some people do not qualify as dependents. While there are some exceptions, you generally may not claim a married person as a dependent if they file a joint return with their spouse.
5. Dependents may have to file. If you can claim someone else as your dependent on your tax return, that person may still be required to file his or her own tax return. Whether they must file a return depends on several factors, including the amount of their gross income (both earned and unearned income), their marital status and any special taxes they owe.
6. Dependents can’t claim a personal exemption. If you can claim another person as a dependent on your tax return, that person may not claim a personal exemption on his or her own tax return. This is true even if you do not actually claim that person as your dependent on your tax return. The fact that you could claim that person disqualifies them from claiming a personal exemption.
Remember that a person must meet several tests in order for you to claim them as your dependent. See Publication 501 for the tests you will use to determine if you can claim a person as your dependent.
You can view or download Publication 501 at IRS.gov or order it by calling 800-TAX-FORM (800-829-3676). You can also use the Interactive Tax Assistant at IRS.gov to find out if a person qualifies as your dependent. The ITA is a helpful tool that can answer many of your tax law questions.

Finally Congress Passes Bill To Avoid Fiscal Cliff

 

Congress has voted and passed “American Taxpayer Relief Act” (the Act). The Act will prevent many of the tax hikes that were scheduled to go into effect today and retain many favorable tax breaks that were scheduled to expire, but it would also increase income taxes for some high-income individuals and slightly increase transfer tax rates. Vice President Joe Biden and Senate Minority Leader Mitch McConnell (R-KY) are reportedly credited with negotiating the Act after weeks of failed talks. The Act’s key changes follow:

Tax Rates:  The Act will keep the “Bush” tax rates intact for individuals with taxable income under $400,000 $450,000 for married taxpayers, $425,000 for head of household filers).  Income above these levels would be taxed at a 39.6% rate.

AMT patch:  The Act will permanently patch the Alternative Minimum Tax (AMT).

Capital gains and dividends:  The Act will raise the top rate for dividends and capital gains from 15% to 20% for taxpayers who would be subject to the new 39.6% rate.

Deduction limitations for high-income individuals: The Act will reinstate the limitations on the personal exemption and itemized deductions for taxpayers exceeding certain income thresholds.  The income thresholds are considerably higher than they had been under prior law.

Transfer taxes:  The Act will prevent steep increases in estate, gift and generation-skipping transfer (GST) tax that were slated to occur for individuals dying and gifts made after 2012 by permanently keeping the exemption level at $5,000,000 (as indexed for inflation).  However, the Act would also permanently increase the top estate, gift and GST rate from 35% to 40%.

Individual extenders:  The Act will extend a host of individual provisions including the treatment of mortgage insurance premiums as qualified residence interest, deductions for State and local general sales taxes, and the above the line deduction for qualified tuition and related expenses.

Business tax extenders:  Many key business tax breaks will be extended including depreciation provisions, notably including bonus depreciation, and the research and work opportunity tax credits.

Other items:  The Act will extend unemployment insurance and many health and energy-related provisions, as well as extend farm legislation.  It does not, however, extend the payroll tax cut.

There are many other provisions as part of this tax law change.  But, we are pleased to have some certainty of our tax laws… at least, for now.

The primary cause of all this uncertainty is the question of whether individual tax rates will rise as currently planned. Currently, the following changes are scheduled to take effect on January 1, 2013 if Congress fails to take action to prevent them:

• The six federal income tax brackets now in effect (10%, 15%, 25%, 28%, 33% and 35%) will be consolidated in five higher brackets: 15%, 28%, 31%, 36% and 39.6%
• Some high-income households will be ineligible for certain itemized deductions or personal exemptions
• Net investment income, including qualified dividends, will be taxed at the taxpayer’s income tax rate, which in some cases could be as high as 43.4%
• The capital gains tax rate will rise to 20% from 15%
• The estate tax exemption of $5 million will fall to $1 million and the estate tax rate will rise to 55% from 35%
• The Social Security tax withholding rate will return to 6.2% from the current level of 4.2%

The perennial challenge of passing an alternative minimum tax patch is another cause for concern. If Congress fails to pass a retroactive patch, married couples with AGI as low as $45,000 and single taxpayers with AGI of $33,750 would be subject to the AMT in 2012.

Faced with these potentially higher tax rates in 2013, common wisdom calls for accelerating income and delaying certain deductions to avoid paying higher rates on higher income levels next year. But that strategy could backfire if Congress does reach a compromise that avoids the combination of higher taxes and drastic government spending cuts that threatens to drive the economy off the so-called “fiscal cliff.”

Charitable contributions should be timed so as to obtain the maximum tax benefits, either in 2012 or 2013. If a taxpayer plans to make a charitable contribution in 2013, he should consider making it this year instead if speeding up the deduction would produce an overall tax saving, e.g., because the taxpayer will be in a higher marginal tax bracket in 2012 than in 2013. On the other hand, a taxpayer who expects to be in a higher bracket in 2013 should consider deferring a contribution until that year. This task is more difficult than in prior years because of uncertainty over whether rates will rise next year under the EGTRRA sunset.

In making any sizeable charitable contributions, to the extent possible, taxpayers should make the contributions in appreciated capital gain property that would result in long-term capital gain if sold. That way, a deduction generally is obtained for the full value of the property, such as shares of stock, etc., while any regular income tax on the appreciation in value is avoided. (However, for tangible personalty, this favorable treatment is only available if the donated item is related to the exempt purpose of the donee charity.)

Recommendation: If a taxpayer owns appreciated property which he expects to appreciate still further in value, and which he wants to continue to hold so as to benefit from the additional appreciation, the taxpayer should consider using cash that he would otherwise contribute to charity to buy additional property of the same type and contribute the property he first owned to charity. Not only will he get a deduction equal to the full fair market value of the property he contributes to charity, he will have a higher basis in the newly acquired property, thus reducing the amount of gain he will recognize if he sells it.

Observation: If rates rise after this year as currently scheduled under the EGTRRA sunset, the tax savings on a later sale could be even greater.

It should be noted, however, that contributions of appreciated capital gain property generally are subject to a 30%-of-AGI (adjusted gross income) ceiling, instead of the usual 50% ceiling, unless a special election is made to reduce the deductible amount of the contribution.

Observation: Making the election will limit the donor’s deduction to the basis of the contributed property. In most cases, the election should be made only if the fair market value of the property is only slightly higher than the basis of the property.

IRA distributions to charity. Older taxpayers who plan to use individual retirement account (IRA) distributions to make charitable contributions should bear in mind that the favorable tax provision for doing so expired at the end of last year. That provision, Code Sec. 408(d)(8), allowed taxpayers age 70 1/2 or older to take advantage of an up-to-$100,000 annual exclusion from gross income for otherwise taxable IRA distributions that were qualified charitable distributions. Such distributions weren’t subject to the charitable contribution percentage limits and weren’t includible in gross income. Since such a distribution was not includible in gross income, it would not increase AGI for purposes of the phaseout of any deduction, exclusion, or tax credit that was limited or lost completely when AGI reached certain specified levels.

To constitute a qualified charitable distribution, the distribution had to be made after the IRA owner attained age 70 1/2 directly by the IRA trustee to a Code Sec. 170(b)(1)(A) charitable organization (other than a Code Sec. 509(a)(3) organization or a donor advised fund, as defined in Code Sec. 4966(d)(2)). (Code Sec. 408(d)(8)(B)) Also, to be excludible from gross income, the distribution had to otherwise be entirely deductible as a charitable contribution deduction under Code Sec. 170 without regard to the charitable deduction percentage limits. (Code Sec. 408(d)(8)(C))

Even though a direct distribution from an IRA to a charity was not included in the taxpayer’s gross income, it was taken into account in determining the owner’s required minimum distribution (RMD) for the year.

Under Code Sec. 408(d)(8)(F), qualified charitable contributions aren’t available for distributions made in tax years beginning after Dec. 31, 2011. When this provision expired for post-2009 distributions, Congress retroactively extended it for two years in late 2010. That legislation also allowed taxpayers to elect to treat distributions made in January 2011 as made on Dec. 31, 2010.

Observation: While there has been some talk of an extenders package, it is unclear whether this provision will make it in any such package and if it does, whether there would be a rule allowing January 2013 distributions to be treated as made on Dec. 31, 2012.

Thus, while IRAs may be a potential source of funds for making charitable contributions between now and year end, clients age 70 1/2 or older must be informed that using an IRA to make contributions will be more costly if the special break is not retroactively revived.

Illustration : Jason, who is age 72, is the owner of a traditional IRA with a balance of $300,000, consisting solely of deductible contributions and earnings. He wants to make a contribution of $100,000 to his college before the end of 2012 to mark the 50th anniversary of his graduation. Jason, who is a widower and files his tax return as a single taxpayer, expects to have AGI of $110,000 in 2012, itemized deductions of $25,800 (before taking the $100,000 contribution to his college into account), and a personal exemption of $3,800 in computing his taxable income. The itemized deductions of $25,800 include $20,000 of other contributions to public charities.

If Jason takes a distribution of $100,000 from his IRA, his AGI for 2012 will be increased to $210,000. If he then contributes the $100,000 to his college, it will only increase his total charitable deduction by $85,000 ($105,000 [1/2 of AGI of $210,000] less the $20,000 of other charitable contributions he has made). His itemized deductions will be $110,800 ($25,800 plus $85,000), and his taxable income will be $95,400 (AGI of $210,000 less itemized deductions of $110,800, and less personal exemption of $3,800). Jason’s income tax for 2012 will be $20,172.50.

If the provision were extended and, instead, Jason had the Trustee of his IRA transfer the $100,000 directly to his college, his AGI would not increase and he would not be entitled to a charitable contribution deduction for the amount transferred from the IRA. His AGI would remain at $110,000, his taxable income would be $80,400 ($110,000 less itemized deductions of $25,800, and less his personal exemption of $3,800), and his income tax for 2012 would be $16,130, or $4,042.50 less than under the scenario where he takes a distribution of $100,000 from his IRA and then contributes it to his college.

Recommendation: An eligible taxpayer interested in making a charitable contribution from his IRA directly to a charity, and who hasn’t yet taken his 2012 RMD from the IRA, should consider waiting until the very end of the year to take the RMD. If the rules for qualified charitable distributions are revived for 2012, he can make the contribution to charity from the IRA before year-end and thereby reduce (or eliminate) the need to take a RMD for 2012.

Whistleblower Bradley Birkenfeld, whose $104 million reward from the U.S. Internal Revenue Service set a record three weeks ago, has helped set off a rush of would-be imitators hoping to cash in on a government program to catch tax cheats.

Birkenfeld, now living in New Hampshire, helped lead the IRS to collect hundreds of millions of dollars in U.S. taxes owed on money stashed in Swiss bank UBS AG, where he once worked.

Dean Zerbe, a partner at Zerbe, Fingeret, Frank & Jadav and one of Birkenfeld’s lawyers, estimated he has added at least 15 cases to his roster and lawyers at rival firms reported that they too have seen a notable uptick.

“It’s been a watershed moment for whistleblowing,” said Jordan Thomas, chairman of Labaton Sucharow’s whistleblower representation practice, which has also seen an increase in inquiries.

Although some of the calls are long shots, for the most part “the quality of the people is significantly better, with better inside information, better documentation and better documents” than was typical before Birkenfeld, Zerbe said.

Despite the case, the IRS program, which was overhauled in 2006, has been criticized for moving too slowly. In June, the agency issued a memo to its staff putting deadlines on processing whistleblower claims.

Confidentiality laws keep information about IRS payouts minimal. The agency has said it paid two rewards last year and was on track to pay another three to five this year, including Birkenfeld’s.

According to the U.S. Government Accountability Office, as of last April, a total of 1,387 whistleblowers had identified 9,540 taxpayers since the overhaul was enacted.

Birkenfeld chose to disclose his award on Sept. 11, waiving his right to confidentiality.

GRASSLEY URGES SWIFT ACTION

But Republican Senator Charles Grassley said the IRS will have to move quickly if the Birkenfeld publicity results in more leads.

“Otherwise, the momentum from the IRS’s new policy and procedures and Mr. Birkenfeld’s award will be lost, to taxpayers’ detriment,” Grassley told Reuters by email.

Grassley, who led the 2006 legislative overhaul, has been a frequent critic of the program’s slow progress.

Whistleblowers have a growing number of options beyond the IRS. In the past few years, the Federal False Claims Act has been updated and state-level tax and false claim programs in New York and elsewhere have been changed or created, said lawyer Neil Getnick, of Getnick & Getnick LLP.

A new whistleblower program at the U.S. Securities and Exchange Commission has just finished its first year and the first reward of $50,000 has been given to an anonymous tipster. That is 30 percent of what the SEC has collected in the case so far and will rise as more is collected. A court already has awarded $1 million in sanctions in the case and judgments might yet come against other defendants, the SEC said.

Working against whistleblowers are the long odds of a huge payout, the years most cases take to resolve and the personal turmoil and struggle to find new employment that any informant might face.

Some whistleblowers also face prosecution for their role in any tax evasion. Birkenfeld was himself released in August after 30 months in jail for his role helping taxpayers evade taxes.

Financially, “Birkenfeld hit a home run. Meanwhile, many whistleblowers face enormous dangers,” cautioned New York lawyer Fred Abrams.

In a case that shook Swiss banking to its core, UBS entered into a deferred prosecution agreement in 2009 and paid $780 million in fines, penalties, interest and restitution to settle charges that it helped thousands of wealthy Americans hide billions of dollars in secret Swiss accounts.

Birkenfeld’s jail time has proved quite remunerative. Based on netting roughly $44 million after paying federal taxes and legal fees – which lawyers not involved in the case called a reasonable estimate – he realized about $46,000 for each day he spent in prison.

U.S. authorities are still investigating other Swiss banks.  (Reuters 10/3/12)

Seemingly unconcerned by an impending “fiscal cliff,” Americans bought 1.19 million vehicles in September. The number is the highest seasonally adjusted rate in more than four years, Autodata said. German and Japanese models were the biggest sellers. In its best September since 2007, Chrysler had its 30th straight month of year-over-year sales increases. (The New York Times/Detroit Free Press 10/2/12)

Retail sales during the holiday season will likely increase 4.1%, the National Retail Federation said. Consumers’ uncertainty about the prospects for the economy is the major factor behind the growth forecast that is more than a percentage point below the increases in 2010 and 2011, the group said.  (The Washington Post/The Associated Press 10/1/12)

If Congress and the president let the U.S. fall off a “fiscal cliff” of tax increases at the end of the year, it will cost the average American $3,500, according to a report from the nonpartisan Tax Policy Center. Nearly 90% of Americans’ taxes will go up after existing cuts and exemptions expire, the report says.  (Los Angeles Times/Politics Now blog 10/1/2012)

A Congressional Research Service (CRS) Report entitled “The Alternative Minimum Tax for Individuals” responds to rising concern over the alternative minimum tax (AMT). In particular, it examines the combined effects of not having inflation-adjusted AMT exemption amounts and the pending expiration of the regular income tax cuts under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA, P.L. 107-16) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA, P.L. 108-27) (i.e, the 2001 and 2003 income tax cuts).

Observation: The AMT is only one of the many seemingly intractable problems that Congress will have to consider in the near future, including the EGTRRA sunset of the individual tax rates and close to fifty other “extender” tax provisions that have or are about to expire. A quick fix for the looming AMT problem would be yet another temporary AMT “patch.”

Background. The AMT is the excess, if any, of the tentative minimum tax for the year over the regular tax for the year. In arriving at the tentative minimum tax, an individual begins with taxable income, modifies it with various adjustments and preferences, and then subtracts an exemption amount (which phases out at higher income levels). The result is alternative minimum taxable income (AMTI), which is subject to an AMT rate of 26% or 28%.

For 2012, the individual AMT exemption amounts fall to the “permanent” AMT exemption amounts in Code Sec. 55(d)(1)—unless Congress retroactively changes them—$33,750 for unmarried taxpayers, $45,000 for joint filers, and $22,500 for marrieds filing separately. The 2001 and 2003 tax cuts provided temporary increases in the AMT exemption amounts as a means of mitigating the interaction between the reductions in the regular income tax and the AMT. These amounts have since been “temporarily” extended and increased over the years by a succession of tax laws. The latest, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the 2010 Tax Relief Act, P.L. 111-312, 12/17/2010), extended higher AMT exemptions amounts for two years (in a so called two-year AMT “patch”).

As an example of the higher exemption amounts, the 2011 exemption amounts were as follows:

• Married individuals filing jointly and surviving      spouses: $74,450, less 25% of AMTI exceeding $150,000 (zero exemption when      AMTI was $447,800); (Code Sec. 55(d)(1)(A)
• Unmarried individuals: $48,450, less 25% of AMTI exceeding      $112,500 (zero exemption when AMTI was $306,300); (Code Sec. 55(d)(1)(B))      and
• Married individuals filing separately: $37,225, less      25% of AMTI exceeding $75,000 (zero exemption when AMTI was $223,900). But      AMTI was increased by the lesser of $36,225 or 25% of the excess of AMTI      (without the exemption reduction) over $223,900. (Code Sec. 55(d)(1)(C))

Observation: The AMT exemption amount for married individuals filing separately is 50% of the AMT exemption amount for joint filers and surviving spouses. Thus, for 2011, the AMT exemption amount for married individuals filing separately was increased to $37,225 (50% of $74,450).

Similarly, the ability of individuals to use most nonrefundable personal credits to offset AMT has also been temporarily extended over the years by a series of tax laws so that individuals have been able to use most nonrefundable personal credits to offset AMT. Thus, for example, for tax years beginning during 2011, an individual could offset his entire regular tax liability and AMT liability by the nonrefundable personal credits. (Code Sec. 26(a)(2))

Observation: The rule allowing nonrefundable personal credits to reduce the AMT (as well as regular tax) benefits middle income individuals who: (a) have low taxable income (and thus a low regular tax), e.g., because of a large number of personal exemptions; (b) are subject to the AMT because personal exemptions (as well as the standard deduction and certain itemized deductions) generally aren’t allowed in computing the AMT; and (c) have substantial nonrefundable personal credits.

Unless there’s a law change, for tax years beginning after 2011, nonrefundable personal credits—other than the adoption credit, the child credit, the savers’ credit, the residential energy efficient property credit, the non-depreciable property portions of the alternative motor vehicle credit, the qualified plug-in electric vehicle credit, and the new qualified plug-in electric drive motor vehicle credit—will be allowed only to the extent that the individual’s regular income tax liability exceeds his tentative minimum tax, determined without regard to the minimum tax foreign tax credit. For tax years beginning after 2012, the child tax credit and the adoption credit also will be subject to the above general limitation.

CRS’s analysis. The CRS Report notes that unless Congress acts, the combined effects of inflation and the reductions in the regular income tax will cause an estimated 30 million plus taxpayers, or roughly one-fifth of all taxpayers, to be hit by the AMT in 2012. Under the regular income tax, the tax rate structure, the standard deductions, the personal exemptions, and certain other structural components are indexed so that they do not lose their real (inflation-adjusted) value over time. However, the structural components of the AMT are not indexed for inflation.

The lack of indexing means that over time, real AMT tax liabilities will increase because of inflation. The gap between tax liabilities under the regular income tax and the AMT will shrink, and many taxpayers could end up subject to the unindexed AMT or experience reductions in their nonrefundable tax credits under the regular income tax.

This problem has long been recognized. In ’97, approximately 605,000 taxpayers or about 1% of all taxpayers were subject to the AMT. In 2009, 3.8 million or about 2.7% of all taxpayers were subject to the AMT. Estimates indicate that in 2012 (when the latest AMT patch expires), over 30 million taxpayers will either fall under the AMT or have AMT limits on their tax credits under the regular income tax. If there is no patch for the AMT, then by 2020, 58 million taxpayers will be affected by the AMT.

Any future reductions in the federal income tax burden without accompanying modifications to the AMT would likely increase the number of taxpayers subject to the AMT. Despite the individual income tax rate reductions and the marriage penalty tax relief provisions of the 2001 and 2003 tax cuts, many taxpayers in the middle income ranges will find that when they file their 2012 returns, the AMT will “take back” much of the tax benefit contained in the tax cuts.

It might be suggested that the regular income tax should be reformed so as to bring it more in line with an economically ideal income tax (ending any number of special tax preferences). Then, the AMT could be eliminated. However, the CRS Report concludes that it is unlikely that the tax base of the regular individual income tax will be broadened to the point where there was no place for an AMT.

CRS’s conclusion. The CRS Report concludes that Congress should consider modifying the tax system if it wants to: (1) retain the social and economic incentives in the Code while maintaining the concept that everyone should pay at least a minimum level of income tax; and (2) limit the number of taxpayers subject to the AMT. Modification would involve two primary issues: inflation and AMT coverage.

Indexing the structural components of the AMT for inflation—perhaps the most important change that could be made—would allow a consistent separation of the two tax systems (the regular income tax and the AMT) to be maintained over time and would result in substantially reducing the number of taxpayers projected to be affected by the AMT in the future. This was one of the proposals in the President’s FY2013 budget.

The second issue concerns the coverage of the AMT. Originally, the AMT was intended to cover only high-income taxpayers. However, changes to the Code since the AMT was first introduced (primarily the 15% maximum tax rate on dividends and long-term capital gains income under both the regular income tax and AMT) have markedly increased the availability of special tax preferences to taxpayers in the middle and upper-middle range of the income distribution. The CRS Report notes that this is likely to produce large deviations in the income tax liabilities of otherwise similarly situated taxpayers in these income ranges.

The cost. Any permanent fix to the AMT would be expensive. The CRS Report notes that there are several tax reform proposals to deal with the AMT problem, including the repeal of the AMT. But, if the AMT were repealed without adjustments to the regular income tax, the lost revenue would be significant—over $1.3 trillion between 2011 and 2022 if the 2001 and 2003 tax cuts were not extended, and over $2.7 trillion if they were extended.

Indexing the AMT exemption amounts for inflation at the 2009 levels through 2020 (assuming the 2001 and 2003 tax cuts were extended) would cost an estimated $1.2 trillion. The cost of the last two-year AMT patch (for 2010 and 2011) under the 2010 Tax Relief Act was estimated at $136.7 billion. Indexing the AMT for inflation permanently, as proposed in the President’s FY2013 budget, would cost an estimated $1.9 trillion over the 2013 to 2022 budget window. In the Senate, S. 3521 would patch the AMT for the 2012 and 2013 tax years for an estimated revenue loss of $132.2 billion.