Alternative Minimum Tax (AMT) is a parallel tax to the regular tax system. Taxpayers are responsible for paying the higher of the tax calculated under the regular system or the AMT system. Originally it was enacted to ensure that higher income individuals who have a lot of deductions, still have to pay at least a minimum tax. How AMT works is that it disallows certain deductions (which increases a taxpayers taxable income) and then allows a taxpayer to subtract an AMT Exemption amount. This amount is then multiplied by a flat 26% or 28% tax and the result is the AMT Tax. The problem with the AMT legislation is that in the past the AMT exemption amount was not tied to inflation and every year Congress had to “patch” the AMT system in order to make sure that the system keeps with its purpose of making sure wealthy taxpayers pay a minimum tax instead of increasing taxes for middle class taxpayers.

Before the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “2010 Tax Act”) was enacted, it was estimated that if the AMT exemption amount was not “patched” by legislation that an estimated 28 million taxpayers would pay tax under the AMT system (which would mean higher taxes than under the regular tax system) with an estimated 82% of those taxpayers earning less than $200,000. The 2010 Tax Act raised the AMT Exemption amounts for 2010 and 2011. There was no legislation for 2012 AMT Exemption amounts and the amounts went from $74,450 for married taxpayers filing jointly ($48,450 for single filers) in 2011 to $45,000 for married taxpayers filing jointly ($33,750 for single filers) in 2012.

The Senate and the House passed the American Taxpayer Relief Act of 2012 (which still needs to be signed by the President before it is official) which increases the AMT exemption amount in 2012 to $78,750 for married taxpayers filing jointly and to $50,600 for single filers and puts legislation in the Internal Revenue Code which allows for AMT Exemption amounts to be adjusted by inflation in future years. This is finally a permanent fix to the AMT Exemption amount and will keep taxes lower for over 28 million Americans who would  have seen an average tax increase of around $3,000.