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 that gets triggered when taxpayers make more than the exemption and use many common itemized deductions. The reason the AMT catches those in higher tax brackets is because it eliminates many of those deductions.
That's the annoying part about the AMT. If you make more than the AMT exemption amount and use the deductions, you've got to calculate your taxes twice: once for the regular income tax and once for the AMT.
To add insult to injury, you've then got to pay whichever tax bill is higher.
On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act. It kept the AMT but raised the exemption and phase-out levels for the tax years between 2018 and 2025. As a result, the AMT is projected to affect about 200,000 tax filers per year instead of the 5 million affected in the 2017 tax year. The bill 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 percent 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 percent 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 percent and 28 percent. The tax rate is 26 percent on income below the AMT threshold and 28 percent above it.
For the 2018 tax year, the threshold is $191,500 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 the tax year 2017, the threshold was $187,800 of AMTI or $93,900 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. The exemption reverts to pre-Tax Act levels in 2026.
Here are the levels for the tax year 2017 and for the tax years under the Tax Cut and Jobs Act.
|Single/Head of Household||$54,300||$120,700||$70,300||$500,000|
|Married Filing Jointly||$84,500||$160,900||$109,400||$1 million|
|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 percent paid the AMT. Here is 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 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.