The Alternative Minimum Tax is a mandatory alternative tax to the standard income tax. The AMT typically catches those in higher tax brackets because it eliminates many itemized deductions, as well as the personal exemption. It gets triggered when taxpayers have more taxable income (based on the AMT calculation) than the AMT exemption amount.
So What Exactly Is The AMT?
The alternative minimum tax is a supplemental income tax imposed by the United States federal government in addition to baseline income tax for certain individuals, corporations, estates, and trusts that have exemptions or special circumstances allowing for lower payments of standard income tax.
Overview Of The AMT
The best way to describe the AMT is that it's an entirely separate set of tax laws. Under the AMT, income that would otherwise be tax-exempt becomes taxable which increases the amount of tax owed.
In addition, many expenses that otherwise would be deductible are disallowed. The most common are state income and property taxes, but the list also includes all "miscellaneous deductions," such as investment expenses, tax preparation fees and unreimbursed business expenses. Some types of home-equity interest were also disallowed.
The AMT also replaced the $4,050 personal exemption for each of a family's dependents with a flat amount based on marital status alone, which meant bigger families lost more deductions and were more likely to pay AMT. To top it all off, the AMT exemption itself was phased out at higher income levels.
In recent years, the AMT has become commonplace among higher earners, and those subject to it had almost no chance to avoid it.
2017 Tax Reform Changed Everything
In crafting the Tax Cuts & Jobs Act, Congress made sure not to let AMT spoil the party. It did so in three important ways:
First, by capping the deduction for state and local taxes at $10,000 and eliminating the miscellaneous deductions and personal exemptions, Congress removed some of the biggest adjustments for AMT. In recent years, the taxpayers most likely to pay AMT were those with significant state tax liabilities or large families with many dependents, meaning those related deductions often provided little to no value. So while taxpayers may be upset over the loss of those deductions in 2018, the reality is that now there is much less to add back to AMT, and therefore much less risk of paying that extra tax.
Second, while the regular tax personal exemption was eliminated, the AMT exemption was greatly increased. For couples, the exemption went from $84,500 to $109,400, and the singles exemption went from $54,300 to $70,300. These increases mean more income than ever is now exempt from AMT.
Third, in 2017 couples began to lose the AMT exemption at $160,900 of AMT income. Now, that phaseout doesn't begin until they reach $1 million (singles went from $120,700 to $500,000). So not only is the exemption larger, it's much harder to lose.
As a result of these changes, the majority of taxpayers who paid AMT in 2017 are likely to avoid it in 2018. Taxpayers who've been paying this extra tax simply because of the state in which they live or the size of their family may finally be able to get out from under the AMT.