Upper Middle Class Has Most to Worry About From AMT in 2014

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.

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