Who Has to Pay the Alternative Minimum Tax?
How the Tax Cut and Jobs Act Changes the AMT for Tax Years 2018–2025
The Alternative Minimum Tax is a mandatory alternative to the standard income tax. It gets triggered when taxpayers make more than the exemption and use many common itemized deductions. The exemption is $109,400 for joint filers and $70,300 for individuals.
The reason the AMT catches those in higher tax brackets is that it eliminates many of those deductions. The AMT hits 60% of the taxpayers making between $200,000 and $500,000.
That's the annoying part about the AMT. If you make more than the AMT exemption amount and claim large deductions, you've got to calculate your taxes twice. The first time is for the regular income tax and the second time for the AMT. To add insult to injury, you've then got to pay the highest tax bill.
In 2017, the Tax Cuts and Jobs Act kept the AMT but raised the exemption and phase-out levels for the tax years between 2018 and 2025. It includes an automatic cost of living adjustment. Congress eliminated the AMT for corporations.
The AMT produces around $60 billion a year in federal taxes from the top 1% of taxpayers.
How the AMT Works
The AMT is different from the regular tax rate because it doesn't have the standard deduction or any personal exemptions. It also doesn't allow most popular itemized deductions. These include state and local income taxes, foreign tax credits, and employee business expenses.
It doesn't allow the interest on home equity mortgages unless the loan was used to improve your home. Real estate and personal property taxes are not deductible. Medical expenses are only deductible if they exceed 7.5% of your adjusted gross income for the tax year 2018.
You must also file if you claim the qualified electric vehicle credit (Form 8834) or the credit for prior year minimum tax (Form 8801).
The AMT also might include other income streams not counted by the regular income tax. For that reason, the AMT tax is higher than the regular tax. These include:
- The fair market value of incentive stock options that were exercised but not sold
- Otherwise tax-exempt interest from private activity bonds
- Foreign tax credits
- Passive income and losses
- Net operating loss deductions
Fortunately, the AMT tax rate is simpler than the regular tax rates. There are only two tax rates: 26% and 28%. The tax rate is 26% on income below the AMT threshold and 28% above it.
For the 2019 tax year, the threshold is $194,800 of AMT taxable income for taxpayers filing as single and as married couples filing jointly. It is $95,750 for married couples filing separately. For comparison's sake, for the tax year 2017, the threshold was $187,800 of AMTI or $97,40000 for those who are married filing separately.
The AMT exemption is much larger than the standard exemption. But it starts to disappear after you reach a certain income level, called the phaseout. Once your income hits the phaseout level, 25 cents of the exemption disappears for every dollar above the phaseout. In 2019, the phaseout is $510,300 in AMTI for single filers and $1,020,600 for married taxpayers filing jointly.
The exemption reverts to pre-Tax Act levels in 2026.
For comparison purposes, here are the AMT levels for the tax year 2017, before the Tax Cut and Jobs Act, and for 2019.
|Single/Head of Household||$54,300||$120,700||$71,700||$510,300|
|Married Filing Jointly||$84,500||$160,900||$111,700||$1,020,600|
|Married Filing Separate||$42,250||$80,450||$54,700||$500,000|
Who Has to Pay the AMT?
You only have to worry about the AMT if your adjusted gross income exceeds the exemption. If you make that income or above, that's the AMT taxable income. You may have to calculate your alternative minimum taxable income and pay the higher tax. You can do so on Form 6251. Your tax software package will do it for you.
Once you qualify for the AMT in a tax year, you must pay it.
But you can adjust your spending to reduce the AMT for the following year. There are four common methods:
- If you are an employee, get your company to reimburse you.
- Make sure your state tax withholding isn't higher than your expected payment. State tax payments aren't deductible under the AMT.
- Pay your property taxes only when they're due. Don't prepay your next installment by the end of the year.
- Sell exercised incentive stock options in the same year you exercise them. If you exercise the options but don't sell, the value of the exercised options becomes income for AMT purposes.
The AMT does not affect everyone above the qualifying income thresholds. Before the new tax bill, it had the most impact on households earning between $500,000 and $1 million annually. But even in that bracket, only 61.9% paid the AMT. Here was the breakout for the tax year 2017, according to the Tax Policy Center:
|Income||Percent Who Pay AMT|
The AMT is more likely to snare married taxpayers with children for several reasons. First, they often have higher incomes, especially if both parents are working. Second, the AMT does not have additional exemptions for each household member. Third, there is no "marriage bonus" under the AMT.
Congress created a simplified version of the Alternative Minimum Tax in 1969 which was originally known as the millionaires' tax. It was designed to make sure the wealthy didn't get away tax-free. In 1969, the Internal Revenue Service discovered that 155 millionaires paid no taxes because they used deductions not available to the average worker. Congress applied a higher tax rate on incomes that reached a certain level.
The Ronald Reagan administration created today's AMT to include more widespread exemptions and deductions. It added the personal exemption, state and local taxes, and the standard deduction. It even targeted deductions like union dues and some medical costs. On the flip side, Reagan's AMT tax reform eliminated the more exotic investment deductions that were used only by the very wealthy.
Congress did not allow the income levels to adjust for inflation. As a result, the definition of wealthy never changed from 1969 levels. Today, that income level would now include much of the middle class. To keep that from happening, Congress passed a "patch" each year that raised the income threshold. Without the temporary fix, families with incomes as low as $30,000 would be subject to the AMT. While the patch protected these families, it also created a lot of uncertainty.
In 2013, Congress passed the American Taxpayer Relief Act. It automatically adjusted the income thresholds to inflation. Congress added the AMT fix to a law that prevented the fiscal cliff in 2013. The downside is that when your income hovers just below the threshold, a pay increase greater than inflation might be enough to push you over the AMT limit.
Note: Consult a tax expert to determine the impact on your personal situation.