Options for an uncertain AMT

Nov 4, 2012 @ 12:01 am

By Mark Schoeff Jr.

Few elements of the fiscal cliff pack the immediate punch of the alternative minimum tax.

If Congress doesn't increase the exemption for the tax before the end of the year, the number of Americans subject to it will increase to nearly 31 million from about 4 million, according to the congressional Joint Committee on Taxation.

The tentacles of the tax will entangle more middle-income taxpayers in a program originally meant to ensure that the wealthy can't use deductions to escape most of their share of taxation.

That dynamic gives some observers hope that Congress will deal with the AMT during the post-election session of Congress, no matter what happens with the rest of the tax and spending cuts that the cliff comprises.

“For the AMT, I would lean toward a patch before the end of the year,” said Michael Steiner, wealth manager at RegentAtlantic Capital LLC. “If they don't do that patch, it's going to swallow so many more people into AMT.”

Those people are likely to be the middle class, whose complaints would resonate on Capitol Hill.

“That will get their attention,” Tim Steffen, director of financial planning at Robert W. Baird & Co., said of lawmakers.

He points out that the AMT is different from other taxes that need to be dealt with in the fiscal cliff, such as individual and capital gains rates.

“They can resolve those any time in 2013 and make them retroactive to the beginning of the year,” Mr. Steffen said.

Optimism about congressional action on the AMT before the end of the year comes with a healthy dose of caution.

“I would think the chances are good but less than 100%,” said Jon Traub, a managing principal at Deloitte Tax LLP and a former aide to House Ways and Means Committee Chairman Dave Camp, R-Mich. “It would be difficult, if not impossible, to undo the impact in 2013 of not having passed the patch this year.”

Another former congressional staffer is pessimistic that lawmakers will act on the AMT separately from the rest of the fiscal cliff because it's a key bargaining chip.

“It's possible, but with a down arrow,” said Dean Zerbe, managing director of alliantgroup LP and a former tax counsel to the Senate Finance Committee. “It's an important piece of the effort to get a bigger deal on taxes. Republicans aren't going to want to give away dessert before anyone has eaten their vegetables.”

Both the House and Senate have a head start on AMT work in advance of post-election, fiscal-cliff negotiations.

Without congressional action, the AMT exemption would snap back to $33,750 for individuals and $45,000 for couples from the 2011 levels of $48,450 for singles and $74,450 for couples.

In August, the Senate Finance Committee approved a bill that included an AMT “patch” that would increase the exemption to $50,600 for singles and $78,750 for couples in 2012 and $51,150 for singles and $79,850 for couples in 2013. It also would allow nonrefundable personal tax credits against the AMT, according to a committee fact sheet.


Senate Majority Leader Harry Reid, D-Nev., did not allow the bill that contained the AMT patch, and other tax extenders, to get to the floor before the chamber recessed for the election.

On the other side of the Capitol, the House approved a bill over the summer that would patch the AMT in the same way as the Senate bill.

The White House, however, threatened to veto the measure because it also would extend the Bush administration tax cuts for a year for all income levels. The Obama administration wants to continue the Bush-era tax cuts only for individuals earning less than $200,000 annually and couples making less than $250,000.

While Congress dawdles, investment advisers and their clients are stuck in limbo. The AMT roils normal tax planning strategies such as accelerating deductions and deferring income because it prohibits the deduction of state, local and real estate taxes.


Clients may want to look at charitable deductions, which are allowed under the AMT, according to Mr. Steiner.

Not exercising stock options may be a good idea, because executing them can put a client further into the AMT, according to Mr. Steffen.

“It's easier to avoid things that will put you into AMT than to do things that would pull you out of AMT,” he said.

There may be good reason, however, for clients to boost their adjusted gross income and stay within the AMT range. If the Bush tax cuts expire, the top marginal rate would increase from 35% to 39.6%, making the 28% AMT rate look better. For instance, clients may want to move money out of a regular individual retirement account into a Roth IRA.

“That's not such a bad bracket in this environment,” Mr. Steiner said. “That's why a Roth conversion makes sense. People are listening.”

Ultimately, the strategizing may be pointless. Whether clients fall within the AMT range depends on almost existential factors such as where they live and how much money they make — both of which are difficult to change.

“If you were in AMT last year and the year before, you're likely to be in AMT again,” Mr. Steiner said. “Once you're in, you're in.”

mschoeff@investmentnews.com Twitter: @markschoeff


What do you think?

View comments

Recommended for you

Upcoming Event

Apr 30


Retirement Income Summit

Join InvestmentNews at the 12th annual Retirement Income Summit - the industry's premier retirement planning conference.Much has changed - and much remains to be learned. Attend and discuss how the future is full of opportunity for ... Learn more

Featured video


The who, what and why of ETFs

What's next for exchange-traded funds? Jillian Delsignore of J.P. Morgan Asset Management offers her thoughts on what we can expect from "chapter two" for this growing product segment.

Latest news & opinion

Raymond James executives call on industry to keep broker protocol

Also ask firms to pay for the administration of the protocol to 'ensure its longevity and relevance.'

House passes tax bill, focus turns to Senate

Tax reform legislation expected to have more of a challenge in upper chamber.

SEC enforcement of advisers drops in Trump era

The agency pursued 82 cases against advisers and firms in fiscal year 2017, down from 98 the previous year.

PIABA accuses Finra of conflicts of interest

Public Investors Arbitration Bar Association report slams self-regulator over its picks for board of governors.

Betterment launches 'free' charitable-giving platform

Robo-software provider lets investors donate directly from their accounts, and will not charge charities with less than $1 million on the platform.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print