The alternative minimum tax, or AMT, was implemented in 1969 to ensure that all Americans pay their fair share of taxes -- particularly high-income individuals with a lot of tax deductions.
Unfortunately, because it was not indexed for inflation, the AMT started to affect taxpayers it was never intended to target, specifically middle-class households. Because of this, the Tax Cuts and Jobs Act made some pretty significant changes to the AMT beginning with the 2018 tax year. With that in mind, here's a quick guide to the recent AMT changes and what Americans need to know about the AMT in general.
Image source: Getty Images.
Recent changes to the AMT
The general idea of the AMT isn't changing. As we'll get into in a bit, there are certain deductions that are not allowed for AMT purposes that are added back into your taxable income, and these are generally the same.
The two major changes made to the AMT as part of the Tax Cuts and Jobs Act are intended to ensure that the AMT only applies to higher-income taxpayers, and that this continues to be the case for future tax years.
Specifically, the Tax Cuts and Jobs Act significantly increase the AMT exemption amounts beginning with the 2018 tax year. In other words, the amount of income that can be excluded when determining your alternative minimum taxable income has increased. And, the exemption amounts will be indexed for inflation each year going forward.
To illustrate this, here's how the 2018 AMT exemptions compare to the 2017 exemptions, as well as how the inflation adjustment affected the 2019 AMT exemptions.
|
Tax Filing Status |
2017 AMT Exemption Amount |
2018 AMT Exemption Amount |
2019 AMT Exemption Amount |
|---|---|---|---|
|
Single or head of household |
$54,300 |
$70,300 |
$71,700 |
|
Married filing jointly |
$84,500 |
$109,400 |
$111,700 |
|
Married filing separately |
$42,500 |
$54,700 |
$55,850 |
Data source: IRS.
In addition, the thresholds above which these exemptions start to phase out have dramatically increased, as you can see in this chart.
|
Tax Filing Status |
2017 Phaseout Threshold |
2018 Phaseout Threshold |
2019 Phaseout Threshold |
|---|---|---|---|
|
Married filing jointly |
$160,900 |
$1,000,000 |
$1,020,600 |
|
All others |
$120,700 |
$500,000 |
$510,300 |
Data source: IRS.
This is the key change that prevents the AMT from affecting middle-income households. The exemptions are reduced by $1 for every $4 in alternative minimum taxable income above the thresholds.
Based on the 2017 figures, a married couple filing a joint tax return would start to lose their AMT exemption with alternative minimum taxable income (AMTI) above $160,900 and would lose their entire AMT exemption with AMTI greater than $498,900. Households with incomes in this range can often be considered middle income, especially in higher-cost areas of the U.S. In contrast, for 2018, the full exemption can be used with AMTI of as much as $1 million, and the entire exemption isn't lost until AMTI exceeds $1,437,600.
How is the AMT calculated?
The general idea is that the AMT is calculated by adding certain deductions and other adjustments back in to a taxpayer's taxable income. The deduction for state and local taxes, also known as the SALT deduction, is a good example of a deduction that isn't allowed for the purposes of the AMT. The deduction for a net operating loss in a business is another one that is added back in when determining AMT liability.
Some deductions are still allowed when calculating AMT. The mortgage interest deduction and the deduction for charitable contributions are two good examples, as are retirement contributions and other above-the-line deductions.
Depending on how many tax deductions you have, the calculation of your alternative minimum taxable income can be rather complicated.
Fortunately, you can use tax software, such as Turbo Tax, which will do the AMT calculation for you. However, if you file a paper tax return, you'll calculate your alternative minimum taxable income and your AMT, if applicable, on IRS Form 6251.
AMT tax brackets
Your alternative minimum taxable income is then applied to the applicable AMT tax rates, and this part of the calculation is relatively easy. While there are seven marginal tax brackets that are used in the standard U.S. tax system, there are only two for AMT purposes, with rates of 26% and 28%.
|
Filing Status |
26% AMT Tax Rate |
28% AMT Tax Rate |
|---|---|---|
|
Married filing separately |
AMTI up to $95,550 |
AMTI above $95,550 |
|
All other filers |
AMTI up to $191,100 |
AMTI above $191,100 |
Data source: IRS.
Will you have to pay the AMT?
Obviously, there's no way to know for sure if you'll be affected by the AMT in 2018 and 2019 until you get your year-end income total and file your tax return. Having said that, the AMT will certainly affect middle-income Americans less than it has in recent years, and when you combine the changes discussed here with the generally lower regular tax rates that were also implemented by the Tax Cuts and Jobs Act, it's fair to say that far fewer people will be affected by the AMT going forward.
