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What You Need to Know about the New AMT

Last update on: Jun 22 2020

The Alternative Minimum Tax (AMT) has changed, and it won’t trap nearly as many people as in the past.

The AMT is perhaps the original Stealth Tax. When created in 1969 it was targeted at wealthy individuals who used a lot of tax breaks to avoid paying any income tax. But Congress didn’t adjust the AMT as other parts of the tax code changed. The result was that more recently the AMT would snare many middle class taxpayers, especially retirees, who already would have paid substantial taxes under the regular income tax. They paid more under the AMT.

The AMT is a second tax system. You compute your regular income tax. Then, you also compute the tax under the AMT by adding back to your regular taxable income any relevant tax breaks, known as tax preferences. AMT taxable income is subject to only two tax rates. A 26% rate is paid on the first $191,000 of AMT taxable income, and a 28% rate on higher AMT taxable incomes.

The Tax Cuts and Jobs Act, enacted in December 2017, substantially changed the AMT. About 5 million taxpayers were expected to pay the AMT under the old law, but only 200,000 are expected to pay the AMT this year. So few taxpayers will owe the AMT that the IRS says it will remove its online AMT Assistant tax tool.

Three key changes returned the AMT to being primarily a millionaire’s tax.

First, the AMT exemption was increased substantially. For taxpayers who are married filing jointly, the exemption is $109,400 in 2018. It is $70,300 for singles and heads of household, and the exemption is $54,700 for married taxpayers filing separately. Those exemptions compare to $84,000, $54,300 and $42,250, respectively, for 2017.

Second, the income levels at which the exemptions phase out are much higher. They are $1 million for married couples filing jointly and $500,000 for other taxpayers. In 2017, the phaseout levels were $160,900 and $120,700, respectively.

Third, many of the tax breaks that triggered the AMT for middle class taxpayers have been changed. Middle income taxpayers frequently were subject to the AMT when they had high levels of personal and dependent exemptions, deductions for miscellaneous itemized expenses, home equity mortgage interest, and state and local tax deductions. The personal exemptions are eliminated (though dependent exemptions remain), as are miscellaneous itemized expenses and the home equity interest deduction. The state and local tax deduction is limited to $10,000 per tax return. Collectively, they are replaced by a much higher standard deduction.

The combination of these changes means you need to have a lot of tax preference items to trigger the AMT. In the past, because the exemption amount was so low, a slightly above-average amount of preference items would push a taxpayer into the AMT.

A number of tax preference items remain. They’ll be listed on IRS Form 6251 and its instructions. Incentive stock options remain a key AMT trigger for many employees at companies that use them as compensation. Other key preference items are the standard deduction, some net operating losses, some types of accelerated depreciation and interest on private activity tax-exempt bonds. A significant amount of long-term capital gains also can trigger the AMT, as can having a lot of dependents.

As before, the AMT is so complicated that it isn’t possible to give general rules about who is at risk. The trigger varies with your regular income tax bracket and the amount of tax preference items you have. The higher your income, the more preference items you need to trigger the AMT. Also, because of some nuances in the interplay between the regular income tax and the AMT, single taxpayers are a bit less likely to trigger the AMT than married taxpayers filing jointly.

You should estimate your taxes both ways during the year to determine if you might trigger the AMT. Use the results to plan your transactions for the rest of the year.

As with many other provisions in the 2017 tax law, the changes in the AMT are scheduled to expire after 2025.

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