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LOISELLE,
GOODWIN & HINDS
CERTIFIED PUBLIC ACCOUNTANTS
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The recently passed 2004 Working Families Act extended the life of several popular tax breaks that had expired or were scheduled to expire at the end of 2004. This article details two key provisions of the new law which extend partial relief to individual taxpayers from the alternative minimum tax, or AMT.
Brief overview of the AMT.
The AMT is a parallel tax system originally intended to insure that all taxpayers with substantial income pay a reasonable amount of tax. To accomplish this, various deductions allowed for regular tax purposes are disallowed for AMT purposes—for example, the deduction for state, local and property taxes. Taxpayers who may be subject to the AMT must calculate their regular tax liability and their AMT liability. If AMT liability is greater, that's what they owe the federal government. Originally enacted to make sure that wealthy Americans did not escape paying taxes, the AMT has started to ensnare more middle-income taxpayers due to the fact that the AMT parameters are not indexed for inflation.
Extension of increased AMT exemption amounts through 2005.
In recent years, Congress has provided a measure of relief from the AMT by raising the AMT “exemption amounts”—allowances that reduce the amount of alternative minimum taxable income, reducing or eliminating AMT liability. (However, these exemption amounts are phased out for taxpayers whose “alternative minimum taxable income [AMTI] exceeds specified amounts.) Under 2003 tax legislation applicable to tax years beginning in 2003 and 2004, the exemption amount was increased to $40,250 (from $35,750), for unmarried individuals who aren't surviving spouses; to $58,000 (from $49,000), for married couples filing a joint return and surviving spouses; and to $29,000 (from $24,500), for married individuals filing separately. However, this partial relief was set to expire for tax years beginning after 2004, and the exemption amounts were scheduled to revert to the amounts allowed under pre-2003 law.
The 2004 Working Families Act preserves the partial relief from the AMT by extending the 2003 increases in the exemption amount to 2005. Thus, for 2005, AMT exemption amounts are as follows:
Nonrefundable personal credits may be used to offset AMT through 2005.
Under the regular tax, the amount of nonrefundable personal credits allowed in a tax year is subject to a limitation based on tax liability. For tax years beginning in 2003, all the nonrefundable personal credits were allowed to the extent of the full amount of the individual's regular tax and alternative minimum tax (AMT). Thus, individuals could use these credits to offset AMT liability as well as regular tax liability. Under pre-2004 Working Families Act law, this rule didn't apply in tax years beginning after 2003. For those years, the nonrefundable personal credits (other than the adoption credit, the child tax credit and the credit for elective deferrals and IRA contributions (the saver's credit)) could not be used as an offset against AMT. The adoption credit, child tax credit, and the saver's credit were each subject to separate limitations which permitted the AMT offset.
The 2004 Working Families Act extends the rule allowing the nonrefundable personal credits to the full extent of the regular tax and the AMT, so that it applies for tax years beginning in 2004 and 2005. Thus, in 2004 and 2005, all of the otherwise allowable nonrefundable personal credits (not just the adoption credit, child tax credit and saver's credit) may reduce AMT.
Be sure to visit our Archive of Prior News Items