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 and other tax benefits. Beginning in the 2018 tax year, the Tax Cuts and Jobs Act repeals AMT for corporate taxpayers but retains and temporarily eases the impact of AMT for individual taxpayers.
Below, tax law specialist Mike D’Avolio, CPA & JD from Intuit’s ProConnect Group answers important questions regarding the AMT and how you and your clients should be addressing the changes.
What do you consider to be the most significant among those changes, and which taxpayers are likely to be affected the most?
D’Avolio: To understand the significant changes, first you must understand how alternative minimum taxable income (AMTI) is calculated. AMTI is computed by adding or subtracting AMT adjustments (i.e. 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.
So, 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. It also permanently indexes the exemptions for inflation going forward. The combination of these two changes makes it less likely for AMT to impact taxpayers, especially those at the lower income levels. The most significant changes are as follows:
1. Exemption amounts have been increased to the following levels:
- Married filing joint /surviving spouse taxpayers: $109,400 (from $86,200)
- Unmarried taxpayers: $70,300 (from $55,400)
- Married filing separate taxpayers: $54,700 (from $43,100)
2. Phase-outs of the exemption have increased to the following levels:
- 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, the threshold levels were: $164,100 for joint and surviving spouse filers; $123,100 for unmarried filers; and $82,050 for separate filers.
What factors are most likely to make one subject to AMT now compared to before?
D’Avolio: In prior years, many taxpayers ended up having to pay alternative minimum tax 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, you’ll have fewer preference or add-back items for AMT purposes. Consequently, because of these changes, the impact of AMT will be further reduced beginning in 2018. You can reasonably expect the number of taxpayers it affects to drop going forward.
How does a taxpayer figure in advance if the AMT is a possibility?
D’Avolio: The calculations associated with AMT can be very complex and involve the computation of regular tax as well. You probably need to use a tax planning software or meet with a tax professional to figure out the true impact of AMT in your tax situation.
And what strategies can one use to reduce the hit?
D’Avolio: As previously discussed, the impact of AMT will be reduced or eliminated beginning in 2018. To reduce one’s regular and AMT tax bill, folks can apply some general principles, such as deferring income (invest in a retirement plan) and accelerating deductions (prepay expenses).
To lower your AMT liability further, you can try to reduce your AMT adjustments and preference items, such as choosing a depreciation method that does not generate an AMT adjustment or not investing in private activity bonds (the interest income is an AMT add-back).
Did the changes leave some issues still to be addressed?
D’Avolio: Although AMT for individuals was not repealed like it was for corporations, Congress did go a long way to reduce the impact of AMT.
What else should you be asking?
D’Avolio: If your alternative minimum tax hit may go away or be reduced as a result of the increased AMT exemptions, higher phase-out levels for the exemption and other changes discussed above, you may be able to reduce your wage withholding or estimated taxes beginning in 2018.