As it does in the fall of every year, the IRS has calculated the effect that inflation has had on the income tax brackets that are used to compute the individual income tax, and it recently has announced what the tax brackets will be for 2012. These adjustments are required under the tax law, but they are limited to the Regular Tax brackets only – no similar adjustments are made for the Alternative Minimum Tax. Unless Congress specifically addresses the issue with another AMT Patch, this mismatch will result in approximately 25 million additional taxpayers becoming subject to the AMT in 2012.

The Patch

The Patch, as it is famously known, is the mechanism used by Congress to offset the failure of the tax law to automatically require an adjustment of the AMT brackets for inflation. This failure, with the resulting need for the annual Patch, has been going on since 2000, over a decade now. The reason for the constant one-year fixes, or "patches," is simple – it has been estimated that a permanent fix would cost in excess of one trillion dollars. While the one-year fixes in and of themselves are expensive, there is simply no way that Congress could ever find enough money to do a permanent fix in the absence of a complete overhaul of our U.S. tax system.

The AMT exemption

The actual Patch mechanism is the making of an adjustment to the Alternative Minimum Tax exemption amount. For a married couple filing a joint return, for 2011 the exemption amount is $74,450 (other filing statuses have different exemption amounts). What this means is that taxable income for AMT purposes will be $74,450 less than what it otherwise would be, after increasing Regular Tax taxable income for the numerous AMT adjustment items. The purpose of this is to ensure that folks at lower levels of taxable income, and folks who don’t have very many AMT items, are not caught in the AMT net.

What happens if there is no Patch

If Congress does not enact another Patch, the exemption amount will drop significantly, all the way back to what it was in 2000. For a married couple, this would equate to an exemption of only $45,000 – 40 percent less than what it is today. This substantial drop in the exemption would result in the 25 million additional AMT payers mentioned above.

When will Congress act?

Although one can never predict when Congress will get around to doing things, as we have seen time and time again Congress does tend to postpone dealing with difficult issues until the very last moment. Thus, even though these 25 million individuals technically become AMT payers on January 1, 2012, the average time it has taken Congress to enact the Patch is seven months into the tax year. Thus, if they followed this average we won’t know until July, 2012 what the revised exemption amount is. But don’t’ assume July - twice during the past decade it has actually taken Congress until December to enact the Patch.

The "Patch watch"

Congress knows what it needs to do. All that can be done is to wait, and watch and monitor the goings-on in Washington. Future articles will be doing exactly this, and reporting on any developments when they occur.