The American Taxpayer Relief Act (ATRA) has three provisions on the alternative minimum tax (AMT) that are important for high-income taxpayers, particularly those who exercise incentive stock options.
- ATRA permanently indexed the AMT income exemption amounts for inflation in future years. The exemption amounts for 2014 are $52,800 for single filers and $82,100 for joint filers. (The exemption amounts for 2013 were $51,900 and $80,800.)
- The law indexed the income thresholds where the phaseout of the AMT income exemption begins (the first time this has ever been indexed). AMTI exemption amounts are phased out by 25 cents for every dollar of AMTI over specified exemptions. In 2014, for married joint filers the phaseout range starts at $156,500 of AMT income; for single filers, the phaseout starts at $117,300 of AMT income. The exemption is fully phased out when AMTI is equal to or exceeds $484,900 for joint filers and $328,500 for single filers. (In 2013, for married joint filers the phaseout range started at $153,900 of AMT income; for single filers, the phaseout started at $115,400 of AMT income. The exemption was fully phased out when AMTI was equal to or exceeded $477,100 for joint filers and $323,000 for single filers.)
- Achieving yet another first, ATRA also indexed the income threshold where the 26% AMT rate ends and the 28% AMT rate begins. In 2014, for unmarried single filers and married joint filers alike, this threshold is $182,500; for married people filing separate returns, the threshold is $91,250. (In 2013, for unmarried single filers and married joint filers alike, this threshold was $179,500; for married people filing separate returns, the threshold was $89,750.)
The permanent indexing of the AMT income exemption amounts for inflation was an important development. Before the passage of the American Taxpayer Relief Act, Congress had enacted temporary AMT relief every year for several years as a stopgap measure to keep middle-income people from being unfairly hit by the AMT. This worked as an interim measure, but the annual process in Congress for passing each patch was tortuous, politically charged, and full of uncertainty. Eventually, there was a consensus that the matter was too important to be left to last-minute legislative activity every year. Without annual increases to control the spread of the AMT, the AMT exemption amounts would have returned to the low levels of 2000 ($45,000 for joint filers and $33,750 for singles), imposing the AMT on a vast population of middle-income taxpayers it was never intended to tax. By essentially automating the annual AMT patch, the indexing of the exemptions for inflation obviated the former annual need for Congressional action and eliminated the related yearly uncertainty.
If you are still stuck with the AMT, even after the three tax-law changes detailed above, there are planning techniques that can help. See FAQs on myStockOptions.com about how to minimize AMT liability, or how to manage the AMT if you know you must pay it.