The Tax Cuts and Jobs Act made many changes to the individual tax law in the United States, and this includes the alternative minimum tax, or AMT.
The GOP had been hoping to reduce the impact of the AMT, or even to repeal it entirely. Here's a primer on the AMT, why a modification was necessary, and what it could mean to you and other U.S. taxpayers.
Image source: Getty Images.
What is the alternative minimum tax?
As the name implies, the alternative minimum tax, or AMT, is a different way to calculate federal income tax in the United States. It was implemented in 1969 to ensure that high-income households paid their fair share of taxes, regardless of how many deductions they were entitled to.
The AMT is calculated by starting with your adjusted gross income (AGI) and adding back in a bunch of deductions that aren't allowed for AMT purposes. Major examples include the deductions for state and local income taxes, personal property taxes, and deductions for a net operating loss. The mortgage interest deduction and charitable contributions are still allowed, as are "above-the-line" deductions like IRA contributions.
While there are seven tax brackets in the standard income tax calculation method, the AMT has only two: 26% and 28%. For 2018, here are the alternative minimum tax brackets:
|
Filing Status |
26% AMT Tax Rate |
28% AMT Tax Rate |
|---|---|---|
|
Married filing separately |
AMTI up to $95,750 |
AMTI above $95,750 |
|
All other filers |
AMTI up to $191,500 |
AMTI above $191,500 |
Data source: Tax Foundation.
Taxpayers calculate their federal income tax using the standard method and the AMT method; they are required to pay the higher of the two amounts.
Why did the GOP make a change?
The problem with the implementation of the AMT is that the exemptions weren't initially indexed for inflation. Over time, as wages increased, the AMT started to apply to more and more taxpayers, including middle-income households who the tax was never supposed to affect.
According to the Tax Policy Center, about 2% of 2017 tax returns with income in the $100,000-$200,000 range will be affected by the AMT. For households in the $200,000-$500,000 income range, many of which could be considered middle-income in high-cost areas of the U.S., 29.4% of tax returns are expected to be affected.
The new AMT exemptions and phase-out thresholds
In order to ensure that the AMT primarily affects its intended targets (high-income households) from 2018 on, the Tax Cuts and Jobs Act significantly increases the AMT exemption amounts and dramatically raises the phaseout thresholds for these exemptions. It also permanently indexes the exemptions for inflation going forward.
When calculating AMT for the 2018 tax year, here are the exemption amounts taxpayers will use:
|
Tax Filing Status |
2017 AMT Exemption Amount |
2018 AMT Exemption Amount |
|---|---|---|
|
Single or head of household |
$54,300 |
$70,300 |
|
Married filing jointly |
$84,500 |
$109,400 |
|
Married filing separately |
$42,250 |
$54,700 |
Data source: Tax Cuts and Jobs Act.
The ability to use these exemptions phases out for high-income households. In 2017, these were set at $160,900 for joint filers and $120,700 for individuals, and the allowed exemption was raised by $1 for every $4 in alternative minimum taxable income (AMTI) in excess of these thresholds.
With these lower thresholds, you can see how middle-income households could have been affected.
For the 2018 tax year, these thresholds have been dramatically raised to $1,000,000 for joint filers and $500,000 for individuals. In other words, the full AMT exemptions can be taken by taxpayers who earn less than these thresholds, and the exemptions don't go away entirely until AMTI of $1,437,600 for couples, $781,200 for singles and heads of household, or $718,800 for married individuals filing separately.
It's also worth mentioning that the calculated AMT for some people will now be closer to their standard tax calculation, thanks to the repeal of certain deductions that were formerly added back in for AMT purposes. For example, miscellaneous itemized deductions such as employee business expenses and interest on home equity loans are no longer allowed as deductions, so they no longer have an impact on AMT.
Calculating AMT in 2018
The calculation for AMT can get quite complicated for some people, but let's look at a simplified example.
Let's say that you're a single taxpayer and that your adjusted gross income after deductions in 2018 is $250,000. The deductions that you need to add back in for AMT purposes are the following:
- $6,000 in state and local taxes
- $4,000 in personal property taxes
This gives you an alternative minimum taxable income (AMTI) of $260,000. This is well under the $500,000 phaseout threshold, so you would be entitled to subtract the entire AMT exemption of $70,300, which results in a final taxable amount of $189,700. Applying this to the AMT tax brackets reveals an alternative minimum tax of $49,322. If your federal income tax under the standard calculation method is less than this amount, you would pay this instead. If you calculate a higher federal income tax under the standard method, you would pay that amount.
The AMT will apply to fewer people in 2018
The effect of this should be that few, if any, middle-income households should be affected by the AMT in 2018 and beyond. It will still be a significant part of the tax system for the highest-earning households, but it's fair to expect the number of taxpayers it affects to drop significantly going forward.
