Understanding the Alternative Minimum Tax

Alternative Minimum Tax                                                                                      Who Has to Pay?

the Balance KIMBERLY AMADEO                                                                                                           Investophia JULIA KAGAN

What Is Alternative Minimum Tax (AMT)?

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 annoying part about the AMT is If you make more than the AMT exemption amount and use the deductions, your taxes twice are calculated twice.  To add insult to injury, you've then got to pay whichever tax bill is higher.  Over 4.5 million taxpayers were affected in 2012, by 2017 that number grew to 5 million. 

Purpose of AMT

Congress enacted the AMT in 1969. It was designed to prevent taxpayers from escaping their fair share of tax liability through tax breaks. However, the structure was not indexed to inflation or tax cuts. This can cause bracket creep, a condition in which upper-middle-income taxpayers are subject to this tax instead of just the wealthy taxpayers for whom AMT was invented. In 2015, however, Congress passed a law indexing the AMT exemption amount to inflation.

How the Tax Cut and Jobs Act Changed the AMT Tax Years 2018–2025

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 middle class tax payer is less likely to be affected by the AMT.  It is projected that approximately 200,000 tax filers per year will pay the AMT instead of the 5 million affected in the 2017 tax year. The bill includes an automatic cost of living adjustment. 

The AMT produces around $60 billion a year in federal taxes from the top 1 percent of taxpayers.  Congress eliminated the AMT for corporations.

How the AMT Works

The AMT is different from the regular tax rate because it doesn't have the standard deductions, personal exemptions or allow the 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.  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. 

Tax Cut and Jobs Act 2017 compared to Tax Cut & Jobs Act 2018 - 2025

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. 

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.

** We at TheJNLGroup are not Tax Professionals.                                                                                                  For clarity regarding your specific circumstances, We highly encourage you to consult a CPA / Tax Pro.