Periodically the IRS publishes what it calls its Statistics of Income Bulletin. This document reports data that has been compiled from all of the tax returns filed for the previous year, including data on the Alternative Minimum Tax. This year’s report shows that, for the first time after six straight years of the AMT increasing, the amount of AMT paid and the number of taxpayers paying it decreased from the previous year. Are we finally seeing some needed relief from this burden? Hardly; rather it is just another result of the terrible economy we find ourselves in.

Fall 2011 SOI Bulletin

The Fall 2011 Bulletin includes statistics for tax returns filed in 2010 for the tax year 2009. For this period a total of 142.5 million individual income tax returns were filed, 3.8 million of which were Alternative Minimum Tax payers paying a total of $22.6 billion of AMT. These figures represent a decline from the previous year, during which 3.9 million individuals paid the AMT in the total amount of $25.7 billion. For tax year 2009 the average AMT paid was $5,900, compared to $6,500 for the previous year.

Who are the AMT payers?

The Bulletin breaks down the makeup of AMT payers by level of adjusted gross income (AGI). Even with the decline, this data shows that the distribution stayed essentially the same as the prior year, with 24% of AMT payers being those in the $100-200,000 AGI range and the majority - 63% - being in the $200-500,000 range. So many of those well below what President Obama considers "the rich" are stuck paying this tax that originally was designed to hit only the true wealthy.

Why did the AMT burden drop?

The explanation for the decrease in number of AMT payers and total dollars of Alternative Minimum Tax paid is not the result of any change in our government’s tax policy, unfortunately, but rather is explained simply by the current economic downturn. Specifically, as incomes decrease individuals are having less of those items that trigger the AMT. This applies both on the deduction side of the Alternative Minimum Tax as well as on the income side.

• Itemized deductions, in particular the deduction for state and local taxes

The amount of itemized deductions taken by individuals decreased from 2008 to 2009. The one most important to Alternative Minimum Tax payers, the deduction for state and local income taxes and property taxes, itself decreased 7.5 percent. As all AMT payers know, the more state and local taxes paid, the greater the Alternative Minimum Tax burden. It follows logically, therefore, that lower taxes paid potentially means a lower AMT burden. This won’t necessarily apply to all taxpayers, particularly those whose state legislators saw fit to increase taxes such as Illinois, but in general this result follows.

• Capital gains and dividend income

Capital gains and dividends are taxed at the same low rate both for the Regular Tax as well as the Alternative Minimum Tax. However, the more of these items a taxpayer has the more the taxpayer’s AMT exemption will be phased out and the correspondingly higher his Alternative Minimum Tax burden will be. It follows, therefore, that the worse the stock market does, and the more that companies cut back on their dividends, the less that individuals will see this impact on their AMT exemptions. Again, this won’t necessarily apply across the board, but it generally explains the result.

What should AMT payers do?

Planning to minimize the Alternative Minimum Tax is the same regardless of any changes in a taxpayer’s individual position. If an individual was on the cusp and the current state of the economy dropped him out of the AMT, there are opportunities to time some of his income and deductions to take advantage of this. For example, folks not in the AMT may want to accelerate the deduction of property taxes to take advantage of the opportunity to get a Regular Tax benefit that is not available once back in the AMT. But caution needs to be exercised as a slight change in facts can throw the individual right back into the AMT again. So planning still is, and always will be, the key.

As taxpayers get ready to undertake preparation of their 2011 taxes, this information will be very useful in thinking about 2012 planning. Certainly the 3.8 million still stuck in the AMT need to do this, as well as the 100,000 that dropped out of the AMT last year.