The alternative minimum tax (AMT) subjects taxpayers to a second tax system and is intended to reduce a taxpayer’s ability to avoid taxes by using certain deductions, credits and other tax benefits. Beginning in tax year 2018, the Tax Cuts and Jobs Act repeals AMT for corporate taxpayers, but retains and temporarily eases the impact of AMT for individual taxpayers.
The Congressional Joint Committee on Taxation estimates that about 600,000 taxpayers will pay AMT for the 2018 tax year, representing about $9.5 billion in tax revenue. If your individual client wasn’t affected by AMT prior to tax reform, they are unlikely to be affected under current tax law unless they faced a significant financial change over the past year.
AMT Changes and Impact
Alternative minimum taxable income (AMTI) is computed by adding or subtracting AMT adjustments (e.g. you lose a certain tax deduction for AMT purposes) to the taxpayer’s regular taxable income. Next, a statutory, AMT exemption amount is subtracted from the taxpayer’s AMTI. In addition, the exemption amount is phased-out (or reduced) by 25 percent of the amount AMTI exceeds a certain statutory level.
For individual taxpayers, the Tax Cuts and Jobs Act increases the exemption amounts by 27 percent and significantly increases phase-out thresholds of the exemption for tax years 2018 through 2025 (adjusted for inflation 2019-2025). Consequently, fewer taxpayers will be subjected to AMT.
- Exemption amounts have been increased to the following levels:
- Married filing joint / surviving spouse taxpayers: $109,400 (was scheduled to be $86,200 in tax year 2018)
- Unmarried taxpayers: $70,300 (was scheduled to be $55,400 in tax year 2018)
- Married filing separate taxpayers: $54,700 (was scheduled to be $43,100 in tax year 2018)
- Phase-outs of the exemption have increased:
- These increased exemption amounts are phased-out (or reduced) by 25 percent of the amount of the taxpayer’s alternative taxable income above $1 million for joint filers and surviving spouses and $500,000 for other taxpayers.
- Prior to the change, for tax year 2018, the threshold levels were scheduled to be $164,100 for joint and surviving spouse filers; $123,100 for unmarried filers; and $82,050 for separate filers.
Factors Likely to Subject a Taxpayer to AMT
In prior years, many taxpayers had to pay AMT because certain deductions (such as personal exemptions, the state and local tax deduction, and miscellaneous itemized deductions) were added back and taxed for AMT purposes.
The Tax Cuts and Jobs Act makes the following changes for regular tax purposes between 2018 and 2025:
- Personal exemption is eliminated
- State and local tax deduction is limited to $10,000
- Miscellaneous itemized deductions subject to 2 percent AGI limit (job and investment expenses) is eliminated
Since these tax benefits are eliminated or reduced for regular tax purposes, taxpayers will have fewer preference or add-back items for AMT purposes. Thus, the impact of AMT will be reduced beginning in 2018.
Tax Planning Tips
While the AMT can be expensive, just as in one’s regular tax bill, taxpayers can apply some general tax-saving principles, such as deferring income by investing in a retirement plan, and accelerating deductions by prepaying expenses. Investors can avoid AMT triggers such as owning private-activity bonds since those interest earnings are taxable for AMT but not on the regular return. In some cases, these strategies may help taxpayers avoid AMT altogether.
The calculations associated with AMT can be very complex and involve the computation of regular tax as well. You can serve as a proactive advisor to your at-risk clients by helping them estimate their AMT ahead of next tax season, identifying opportunities to minimize AMT, and encouraging them to prepare for the effect AMT may have on their 2018 tax bill.