The AMT (alternative minimum tax) "patch" is a temporary fix to a big problem. Nearly 40 years ago, Congress created the AMT so that a handful of very wealthy taxpayers would not avoid taxation. The idea worked well at the beginning but over time inflation has eroded the value of the dollar. That handful of very wealthy taxpayers has grown to be many millions. Even more taxpayers, especially taxpayers with household incomes of between $75,000 and $100,000, would have been liable for the AMT this year if it weren’t for the patch. The Treasury Department predicted that without the patch, up to 25 million taxpayers would face an average tax increase of $2,000 for the 2007 tax year.
The patch prevents the AMT from spreading by giving taxpayers higher exemption amounts and allowing them to use most nonrefundable personal credits to offset AMT liability for the 2007 tax year. The 2007 AMT exemption amounts are $44,350 for single taxpayers and heads of household; $66,250 for married couples filing jointly; and $33,125 for married couples filing separately. These amounts are slightly higher than 2006 exemption amounts, which is also good news for many taxpayers.
The new law allows taxpayers to use most nonrefundable personal credits to offset AMT liability. These include the HOPE and Lifetime Learning credits and the District of Columbia first-time homebuyers’ credit. The adoption, child and saver’s credits were already allowed under prior law to the full extent of a taxpayer’s regular tax and AMT.
Calculating the AMT is far from simple. In fact, it is one of the most complicated provisions in the U.S. Tax Code. The patch is also very complex; we can help you. If you have any questions about the patch and AMT liability, please give us a call today at (319) 364-2945.