NEW YORK (TheStreet) -- By the end of the first week in February, there aren't many excuses to delay starting the tax return. Most annual statements, W-2s and 1099s have arrived, and waiting to the last minute only makes costly errors more likely. Also, there's always that nagging question: Will I face the AMT this year?
The alternative minimum tax was established in 1969 to make sure no one could use deductions to escape federal income tax entirely. While aimed originally at the wealthy, it gradually hit more middle-class taxpayers because there was no automatic inflation adjustment for income excluded from the AMT. For years, taxpayers at risk had to wait to see if Congress would pass a temporary increase in this threshold. If it did not, the limits would have reverted to the much lower levels before the Bush tax cuts, and AMT would have netted tens of millions more taxpayers.
That's no longer a worry. The resolution of the "fiscal cliff" showdown early last year established automatic, inflation-based indexing for these income exclusions. For 2013, a couple filing a joint return can get a full exemption on $80,800 of income, a single person $51,900. The exemptions phase out as income goes up.
But it's now the middle class, not the rich, that has the most to worry about from AMT, which denies many deductions allowed on the regular return. Taxpayers at risk must do both returns and pay whichever results in the higher tax. The fiscal cliff deal raised the top tax rate for wealthier taxpayers to 39.6%, versus 28% for the AMT, so now they are more likely to pay more with their regular return, eliminating their worries about AMT. It's not exactly a victory, because their tax bills are going up.The poor and people with modest incomes don't earn enough to be subject to AMT. That leaves the middle class -- or, more precisely, the upper middle class -- as the most vulnerable. Tax experts say the most likely candidates are those with adjusted gross incomes of $200,000 to $500,000. Though you have to do the two returns to know for sure, some factors may make you more vulnerable to AMT. One is living in a place with high state and local taxes. For people in high federal income tax brackets, these tax payments produce big deductions on the regular return. Since they cannot be deducted on the AMT return, they are likely to make the AMT tax larger, triggering the AMT obligation. home equity loan that has been spent on something other than home improvements. Those interest payments would not be deductible on the AMT. Other red flags include taking big business deductions, reporting large investment gains, exercising stock options or having lots of miscellaneous deductions. If you have any of these factors and your income approaches that $200,000 to $500,000 red zone, best get cracking on your return. It also might make sense to assemble some cash to prepare for the worst: an unexpected tax bill.