As tax reform efforts progressed late last year, there were high hopes that the dreaded Alternative Minimum Tax (AMT) would be repealed. Unfortunately, it still exists under the new Tax Cuts and Jobs Act (TCJA). However, the AMT rules are now more taxpayer-friendly and other TCJA changes reduce the chances that you will owe the AMT for 2018-2025.
Here’s what you need to know about how the new and improved AMT for 2018-2025 compares to the previous version, which still applies to 2017 returns that have not yet been filed.
AMT Basics
The AMT is a separate tax system with a family resemblance to the more familiar regular federal income tax system. The difference is that the AMT system taxes certain types of income that are exempt from tax under the regular tax system and prohibits certain regular tax breaks.
The maximum rate of the AMT is “only” 28% compared to the maximum rate of 39.6% which applied under the ordinary tax regime of previous law and the maximum ordinary tax rate of 37% which applies for 2018-2025 under the TCJA.
For 2017, the maximum AMT rate of 28% comes into effect when AMT income exceeds $187,800 for married couples filing jointly and $93,900 for others.
For 2018, the 28% AMT rate begins when AMT income exceeds $191,500 for married couples filing jointly and $95,750 for others.
You are entitled to an AMT exemption, which is deducted in calculating AMT income. The TCJA significantly increases the exemption amounts for 2018-2025. The exemption is removed when your AMT income exceeds the applicable threshold, but the TCJA significantly increases these thresholds for 2018-2025.
If your AMT bill exceeds your regular tax bill, you owe the higher AMT amount. Technically, the AMT liability is the difference between the tax calculated according to the AMT rules and the lower regular tax amount. However, in this column, I will try to make things easier to understand by calling the total amount calculated under AMT rules the responsibility of AMT.
Why companies are still writing so many paper checks
AMT risk factors: yesterday and today
Various interacting factors make it difficult to determine exactly who will be hit by the AMT and who will escape. But here are the most common danger signs under the previous version of the AMT and under the current version of the TCJA that applies for 2018-2025.
Substantial income
High income (from any source) can cause your AMT exemption to be partially or completely removed, increasing the chances of owing the AMT.
TCJA Effect #1: For 2018, the TCJA significantly increases the exemption amounts. For 2018, they are $109,400 for married couples filing jointly and $70,300 for unmarried people. The elimination thresholds are also significantly increased to $1 million and $500,000, respectively. Your exemption amount is reduced by 25% of the excess of your AMT income over the applicable phase-out threshold. But under the TCJA, only those with what I would call very high incomes will have their exemptions phased out, while middle-income people (even what I would call upper-middle income people) will get exemptions. full exemptions.
TCJA Effect #2: The fact that the TCJA lowered five of the seven regular tax rates while leaving the AMT rates at 26% and 28% increases the chances of owing the AMT. The offsetting factor is the TCJA’s liberalized AMT exemption rules (explained immediately above). The interaction of these two factors may result in some upper-middle-income taxpayers still owing the AMT, but they will likely owe less than under the previous law.
Large itemized deductions for state and local taxes
You can generally fully deduct these taxes under the regular federal income tax rules of prior law (if you itemize), but they are completely prohibited under the AMT rules.
TCJA Effect: For 2018-2025, the new law limits the regular tax deduction for combined income and property taxes to $10,000 ($5,000 for those using separate married filing status). So for now, this risk factor has lost most of its teeth.
Numerous personal and dependent exemptions
These deductions are totally disallowed under AMT rules.
TCJA Effect: For 2018-2025, personal and dependent exemption deductions are removed under the new law. So for now, that risk factor is gone.
Exercise of In-the-Money Incentive Stock Options (ISO)
The so-called windfall element (the difference between the market value of the shares on the date of exercise and the ISO exercise price) does not count as income under the regular tax rules, but it does count as income under the AMT rules.
TCJA effect: This risk factor still exists under the new law, and it has always been one of the most common reasons why unsuspecting taxpayers are affected by the AMT.
Material Miscellaneous Itemized Deductions
Under previous legislation, these could include capital expenditures, tax advice and preparation costs, and unreimbursed business expenses of employees. You could write them off for regular tax purposes, but they were completely prohibited under AMT rules.
TCJA Effect: For 2018-2025, the new law eliminates the various itemized deductions that are disallowed under the AMT rules. So for now, that risk factor is gone.
Interest income from private activity bonds
This interest is tax-free for ordinary tax purposes, but taxable under AMT rules.
TCJA effect: This risk factor still exists under the new law.
Deductions for interest on home equity loans
Under the ordinary tax rules of the previous law, you could deduct interest on up to $100,000 of home equity loan balance. But under AMT rules, you can only deduct interest to the extent that you used the loan proceeds to purchase or improve your first or second home.
TCJA effect: For 2018-2015, the new law generally prohibits deductions for interest on home equity loans. This risk factor has therefore lost most of its teeth for the time being.
Apply for the standard deduction
Standard deductions allowed under regular tax rules are completely disallowed under AMT rules.
TCJA effect: For 2018-2015, the new law nearly doubles the standard deduction amounts. Thus, TCJA increases this risk factor.
Example AMT: yesterday and today
The following example illustrates the different results under the prior law AMT rules and under the TCJA’s new and improved AMT rules for 2018-2025.
Example 2: AMT due under the old rules but not the new rules.
In 2017, a married couple filing jointly had itemized deductions totaling $50,000, including $25,000 for state and local taxes. The couple’s income and deductions and calculation of their regular and AMT tax obligations for 2017 are as follows:
Calculation of regular tax 2017
Salary $310,000
Other ordinary income $2,000
Adjusted gross income $312,000
Itemized deductions ($50,000)
Personal exemptions ($8,100)
Taxable income $253,900
Regular tax payable $59,004
Calculation of the 2017 AMT
Regular taxable income $253,900
Add an itemized deduction for taxes of $25,000
Add personal exemptions $8,100
AMT income before exemption $287,000
AMT exemption after partial elimination ($52,975)
Taxable income AMT $234,025
AMT liabilities $61,771
This couple owes the amount of $61,771 AMT for 2017.
Now assume exactly the same items of income and deduction for 2018. The calculation of the 2018 regular tax and AMT amounts under the TCJA is as follows:
Calculation of the regular tax 2018
Salary $310,000
Other ordinary income $2,000
Adjusted gross income $312,000
Itemized deductions (limited to $10,000 for state and local taxes) ($35,000)
Taxable income $277,000
Regular tax payable $55,059
Calculation of the 2018 AMT
Regular taxable income $277,000
Add an itemized deduction for taxes of $10,000
AMT income before exemption $287,000
AMT waiver (no phase-out) ($109,400)
Taxable income AMT $177,600
AMT liabilities $46,176
Bottom Line: Thanks to the TCJA, the couple doesn’t owe the AMT for 2018. They just owe the regular tax amount of $55,059.
The last word
Although the TCJA reduces the chances that you will owe the AMT for 2018-2015, do not assume that you are now exempt from the AMT – especially if you have some of the AMT risk factors that still apply under the new law. Ignoring the fact that you owe AMT can result in back taxes, interest, and possibly even penalties. The good news: If you owe AMT under the new rules for 2018-2025, you probably owe less (maybe a lot less) than under the old rules. Your tax professional can help you determine if you’re in AMT mode under the new rules, and hopefully suggest ways to lessen the blow if you are.
