The Tax Cuts and Jobs Act 2017 (TCJA) made the Alternative Minimum Tax (AMT) rules much more taxpayer-friendly for 2018-2025 and significantly reduced the chances that you would have to pay tax. And if you still owe the dreaded AMT, you’ll probably owe a little less than before. That said, if you had a lot of income in 2021, from capital gains or whatever, you could be at risk.
The AMT is a separate federal income tax system that resembles the more familiar regular federal income tax system. The difference is that the AMT regime imposes certain types of income that are tax-free in the regular plan and prohibits certain reductions that you can claim in the regular plan.
To calculate the AMT, you start with taxable income calculated according to the usual tax rules, then you perform various additions and subtractions to reflect the different AMT rules. The result is your AMT income. If the AMT based on that income exceeds your regular tax amount, you owe the greater amount.
As it stands, the maximum AMT rate is “only” 28% compared to the maximum regular tax rate of 37%.
For 2021, the maximum AMT rate of 28% comes into effect when AMT income exceeds $ 199,900 for married couples filing jointly and $ 99,950 for others.
For 2022, the 28% rate thresholds are respectively $ 206,100 and $ 103,050.
Below these thresholds, the AMT rate is 26%.
Key point: The proposed legislation would increase some regular tax rates for some high income earners. If that happens, I don’t think the higher rates would go into effect until 2022.
Under the AMT rules, you are entitled to an inflation-adjusted AMT exemption (actually a deduction), which is subtracted in calculating your AMT income. The TCJA has significantly increased the exemption amounts for 2018-2025.
For 2021, the exemption amounts are $ 114,600 for married spouses, $ 73,600 for unmarried individuals, and $ 57,300 for married individuals filing separate returns.
For 2022, the exemption amounts are $ 118,100, $ 75,900 and $ 59,050, respectively.
Your exemption is phased out when your AMT income exceeds the applicable threshold, but the TCJA has significantly increased those thresholds for 2018-2025.
Phasing out of exemptions
At high levels of AMT income, your AMT exemption is gradually removed (reduced or eliminated). Specifically, your exemption is reduced by 25% of the excess of your AMT income over the applicable phase-out threshold. Fortunately, the TCJA dramatically increased the phase-out thresholds to levels where most people are unaffected.
For 2021, the phase-out threshold is $ 1,047,200 for married spousal filers and $ 523,600 for other filing categories.
For 2022, the elimination thresholds are respectively $ 1,079,800 and $ 539,900.
Risk factors for TMA
Various interacting factors make it difficult to determine exactly who will be affected by AMT and who will escape. But here are the most common danger signs in the current version of the AMT which applies for 2018-2025.
Substantial income from capital gains or other
When you have a high income, regardless of the source, it can result in the partial or total elimination of your AMT exemption, increasing the chances that you will have to pay the AMT. Many people will report large capital gains on their due 2021 tax returns, which increases their exposure to AMT.
As I just explained, the TCJA has increased both the exemption amounts and the income levels where they are starting to be phased out. This is useful if you have a lot of income in 2021, but it doesn’t necessarily exempt you from AMT.
In addition, the fact that the TCJA lowered five of the seven regular federal tax rates while leaving the AMT rates at 26% and 28% increases the chances of owing the AMT.
Itemized deductions for national and local taxes(SALT)
If you itemize, you could fully deduct SALT under the regular pre-TCJA tax rules. But you were never able to deduct them under the AMT rules. For 2018-2025, the TCJA limits your itemized tax deduction for combined local and state income and property taxes to $ 10,000, or $ 5,000 if using the separate marriage declaration status. So, for 2018-2025, this AMT risk factor is reduced, because the itemized deductions allowed for state and local taxes are so limited.
Key point: The proposed legislation would allow much larger SALT deductions for retailers. If this change becomes law, this risk factor will come back in force.
Personal and dependent exemption deductions
These deductions have always been completely prohibited under AMT rules. However, for 2018-2025, personal and dependent exemption deductions are suspended by the TCJA. So, for now, this AMT risk factor is gone.
Exercise of incentive stock options (ISO)
Incentive Stock Options (ISOs) are a good benefit for employees, but exercising an ISO in the course has federal tax consequences. The so-called windfall element (the difference between the market value of the shares on the exercise date and your ISO strike price) does not count as income under ordinary tax rules, but does count as income under AMT rules. This AMT risk factor still exists under current law.
Mortgage interest deductions
Before the TCJA, you could deduct interest up to $ 100,000 from home equity loan balances. But under AMT rules, you could only deduct that interest to the extent that the loan proceeds were used to buy or improve your first or second home.
For 2018-2015, the new law generally prohibits itemized deductions for interest on home equity loans. However, in some cases, it will be possible to consider a home equity loan to earn deductible qualifying residential interest if you have used the loan proceeds to acquire or improve your primary or secondary residence and your total mortgage debt, including the home equity loan, not to exceed $ 750,000, or $ 375,000 if using the separate married deposit status.
In such cases, you can deduct the interest under regular tax rules and the AMT. However, if the previous test is not successful, the interest on the home equity loan is denied for regular tax purposes for 2018-2025. So, for now, this AMT risk factor has lost its teeth in many cases.
Standard deductions allowed under regular tax rules have always been completely prohibited under AMT rules. For 2018-2015, the TCJA significantly increased the standard deduction amounts, but they are still denied under AMT rules. So TCJA actually increased this AMT risk factor.
Regular tax depreciation deductions from your business and / or your investments in S corporations, LLCs, and partnerships can create AMT adjustments that increase your AMT income and the chances of AMT owing. Under the TCJA, companies can deduct the full cost of many depreciable assets in year 1 under regular tax rules and AMT rules – for qualifying assets put into service between 09/28 / 17 and 12/31/22. Thus, for now, this AMT risk factor is greatly reduced for newly acquired assets. However, it still exists for older assets that you still depreciate under the pre-TCJA rules.
Interest income from private activity bonds
This category of interest income is tax free for ordinary tax purposes, but taxable under AMT rules. So this risk factor still exists.
The bottom line
Although the TCJA greatly reduces the chances that you will have AMT until 2025, don’t assume that you are exempt from AMT, especially if you have some of the risk factors described above. Not knowing that you owe the AMT can lead to back taxes, interest, and possibly penalties. Not good!
Your tax professional can tell you if you are exposed to AMT and perhaps suggest strategies to reduce your AMT profile.
If you owe the AMT for 2021, you may need to make an estimated tax payment to avoid an interest penalty. If so, make this payment by 01/17/21.
The minimum tax credit to the rescue? May be
A portion of your AMT bond can potentially generate what is known as the Minimum Tax Credit (MTC). If so, you can carry the MTC over to future tax years and use it to reduce your normal tax payable until it equals your AMT payable.
TCMs are only generated by AMT liabilities which are attributable to so-called deferral preferences (items that are recognized at different times for regular tax purposes and AMT purposes, such as depreciation deductions).
AMT liabilities which are attributable to the so-called exclusion preferences (Items that are permanently treated differently under regular tax and AMT rules, such as standard deductions) do not generate TCM. Exclusion preferences include:
?? Itemized deductions that are not allowed under AMT rules, such as state and local taxes.
?? Interest deductions on home equity loans if the loan proceeds have not been spent on your first or second residence.
?? Normal deductions.
?? Interest exempt from tax on certain private activity obligations.
Most of the other AMT adjustments and preferences are deferral preferences that will potentially generate TCMs. For example, the windfall element of an ISO’s exercise is a deferral preference, as are AMT depreciation adjustments.
Key point: Calculate the MTC on Form 8801 (Prior Year’s Minimum Tax Credit – Individuals, Estates and Trusts). Specifically, you prepare Form 8801 for the year after the year you pay the AMT to calculate the MTC that was generated the previous year. You then file Form 8801 with your Form 1040 for the following year.