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Your Biggest Tax Break in 2013

Understanding taxes is complicated, but here's a fact that's easy to understand: Thanks to new rules on the dreaded alternative minimum tax, you may well pay thousands less in taxes this April. Even though taxpayers across the nation have complained about new tax increases cutting their take-home pay, what many don't realize is that the AMT provisions in the recent tax compromise legislation will save tens of millions of taxpayers from having to pay as much as $8,000 each in additional taxes on their 2012 returns.

How the AMT works
To get some basic information about what the alternative minimum tax is and why you should care, I turned first to our exclusive Motley Fool ONE Tax Center for guidance. Inside, you'll find out that the revisions to the alternative minimum tax made what's known as the "AMT Patch" permanent and indexing a key exemption amount to rise automatically with inflation.

The history of the AMT goes back to 1969, when the original purpose was to ensure that high-income taxpayers that had taken advantage of tax credits and deductions that completely eliminated their regular tax liability would pay at least some income tax. The original AMT was based on the value of tax benefits received and generally applied only to top income earners.

Since then, subsequent changes have made the AMT a lot more complicated. Now, the AMT is a parallel tax system, with its own rules for determining income and deductions and its own separate exemption amounts. The main problem with the AMT, though, is that its provisions were never indexed for inflation, and so the AMT laws referred specifically to exemption amounts of $33,750 for single filers and $45,000 for joint filers from 1993 to 2012.

Over that span of time, inflation caused those exemption amounts to capture not just rich people but also an increasing number of ordinary taxpayers. Only special "patches" to raise the exemption amount on a one-year basis kept the AMT from hitting tens of millions of taxpayers, and when the fiscal-cliff debate went over the New Year's Eve deadline back in January, more than 30 million taxpayers could have had to pay the AMT for the first time, with the average increase expected to be almost $4,000 and with some taxpayers having to pay as much as $8,000 more due to the AMT.

What the new law did
As a result of the new AMT law, however, there'll be no more need for patches. The new law includes provisions that automatically raise the exemption every year to adjust for inflation. As a result, the AMT should only apply to roughly the same number of taxpayers that paid the tax in 2011, which was around 4 million taxpayers.

Of course, some complain that the entire structure of the AMT has been a failure. Although income is one factor in computing the tax, the AMT disproportionately hits taxpayers who live in places with high state and local income and property tax rates. The reason: state and local taxes are deductible under the regular tax system but aren't deductible under the AMT. That makes middle-income taxpayers who live in those states more likely to get hit than those with similar incomes in low-tax areas.

Moreover, the AMT doesn't always meet its original goal of getting rich individuals and corporations to pay taxes. Individuals can still use a variety of tactics, including investing in tax-free municipal bonds and tax-favored retirement accounts, to zero out their tax liability. On the corporate front, dozens of companies manage to pay no income tax, with a Citizens for Tax Justice study highlighting General Electric (NYSE: GE  ) for reaping more than $4.7 billion in federal tax refunds from 2008 to 2010 despite having profits of more than $10 billion over the period. Fellow Dow Industrials companies DuPont (NYSE: DD  ) and Boeing (NYSE: BA  ) also managed to boast negative effective tax rates, along with a host of utility companies. Too-big-to-fail bank Wells Fargo (NYSE: WFC  ) made the list thanks to the tax losses it acquired in its purchase of Wachovia.

Living with a better AMT
Even with its flaws, the AMT isn't likely to disappear soon. But tens of millions of taxpayers can rest easier thanks to the biggest tax break that the new 2013 legislation brought them.

The AMT is just one of many complicated tax provisions you need to understand better. To get all the answers you need, be sure to check out our Motley Fool ONE Tax Center. There, you'll find an extensive report put together by Fool financial expert Robert Brokamp, and it can be yours free. With tax season winding down, this limited-time offer won't last long, so click here right now and claim this valuable tax resource today!

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Read/Post Comments (6) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 07, 2013, at 11:01 AM, mdk0611 wrote:

    A well written history of the AMT patch and recent legislation. However, it should be noted that another reason the AMT began hitting so many upper middle income (not rich) taxpayers was the 1993 tax legislation. There are only 2 tax rates under the AMT calculation. The 1993 legislation not only raised the top AMT rate, it raised the LOWER AMT rate by 6%. That pushed a whole lot more non-rich into the AMT.

    And if you want to get into corporate taxation, you really should stay away from the 2008-10 time period. Given the severe downturn late in 2008, that period is chock full of net operating losses, as legitimate a deduction as there possibly is, creating refunds, carryforwards, carrybacks and 0% tax rates. More valid points can be raised using a time frame with a less skewed set of facts.

  • Report this Comment On March 07, 2013, at 11:59 AM, Darwood11 wrote:

    The AMT is as close to a poster child for the ineptitude of our Congress as any single piece of legislation.

  • Report this Comment On March 07, 2013, at 1:13 PM, mdk0611 wrote:

    Ineptitude? Not so sure. Subterfuge?

  • Report this Comment On March 08, 2013, at 1:14 AM, sliderw wrote:

    AMT is the Anti Middle-class Tax.

  • Report this Comment On March 08, 2013, at 12:20 PM, martinseth wrote:

    It is worth noting that GE in fact did make federal income tax payments between 2008 and 2010, and annually pays more than $1 billion in other taxes to U.S., state and local jurisdictions.

    -Seth Martin, GE

  • Report this Comment On May 09, 2013, at 4:57 PM, tjcarey wrote:

    Citing the heavily-spun and inaccurate Citizens for Tax Justice report as your only source for corporate tax information brings discredit to the rest of your article and the Motley Fool. I'm apt to overlook articles like this but when I see on on Twitter: @themotleyfool: GE reaped more than $4.7B in federal tax refunds from 2008-2010 despite having over $10B in profits $GE, I see less of a trusted personal finance brand and more of the news media spin that I came here to avoid.

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Dan Caplinger
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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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