The concluding blog excerpted from Christine Benz’s excellent Jan. 3 Improving Your Finances article on Morningstar.com focuses on . . . :
Alternative Minimum Tax
“What’s Happening: Congress put in place an inflation-adjusted exemption amount for the alternative minimum tax, thereby obviating the need for an annual last-minute “patch” to keep new middle-class taxpayers from falling into the AMT zone. Had Congress failed to take action, an estimated 28 million new taxpayers would have been subject to the AMT for the 2012 tax year, according to IRS estimates.
“What You Should Do: Just because the AMT exemption amount will now be automatically bumped up to keep pace with inflation each year, that doesn’t mean those who haven’t been subject to the tax in the past can breathe a sigh of relief. A host of factors affect a taxpayer’s vulnerability to the AMT, both on the tax deductions, exemptions, and credits side as
well as on the income side of the ledger, and those items change from year to year. Exercising stock options is a common trigger for the AMT, because the tax recognizes as income the difference between the grant price and the share price on the exercise date. Income from so-called private-activity bonds–municipal bonds issued to finance projects like sports stadia–are also subject to the AMT, even though munis are usually exempt from federal taxes. If either income source is a significant part of your portfolio–or if
you take a lot of credits, exemptions, and deductions–a tax advisor might be able to help strategize about how to reduce your AMT-related tax hit.
“What’s Happening: Although the estate tax exemption was set to drop to $1 million in 2013 and the estate tax was set to pop up to 55%, the estate tax exemption will remain $5.12 million per individual, and the top estate tax rate will increase to 40% from 35% in 2012.
“What You Should Do: The very high exemption amount may lead all but the highest rollers to think that they don’t need to worry about estate planning, but that’s not necessarily the case. Regardless of the status of the estate tax, everyone needs to mind basic estate-planning matters, including properly drafted beneficiary designations, guardianships for minor children, and powers of attorney for financial and health-care matters.”