The fate of the alternative minimum tax (AMT) has been the subject of much speculation as House and Senate negotiators worked together to reach a conference agreement. Lawmakers agreed to repeal the corporate AMT — per the House version — but retained the individual AMT with temporary increases to the exemption amount and phase-out threshold — resembling the Senate amendment. These changes will temporarily reduce the liability of the AMT compared to the current law, but will retain the complexity associated with the double calculation of the tax liability of households.
Alongside the regular tax code, the AMT is a separate set of rules under which some households must calculate their tax liability a second time. It has a larger exemption amount, but at the same time it has fewer tax preferences; this design allows it to collect more income tax from households that would otherwise claim large deductions and be less taxable. For example, under the AMT, state and local tax deduction is disallowed, miscellaneous itemized deductions are disallowed, and there is no standard deduction. Several other possible tax deductions can also be added to a household’s income – Form 6251, Alternative Minimum Tax-Individuals, has over 60 lines – often making income subject to alternative minimum tax greater than adjusted income. regular.
After calculating income for AMT purposes, households are then subject to an alternative scale that has only two rates: 26% and 28%. For the 2017 tax year, income above the AMT exemption (see below) and below $187,800 is subject to the 26% rate and income above $187,800 is subject to the 28% rate. %.
Currently, more than 4.4 million households are subject to the AMT per year, but even more are affected by it. During the 2015 tax year, more than 10.3 million households had to calculate their AMT liability.
Nearly 60% of households earning between $200,000 and $500,000 were subject to AMT in 2015, the highest share of any income group. Those earning less than $200,000 were highly unlikely to be liable under this parallel tax system.
The exemption amounts under the conference agreement are increased from their current level of $84,500 for co-filers and $54,300 for other filers to $109,400 and $70,300, respectively. This is unchanged from the final Senate amendment and would reduce the number of households subject to AMT.
The threshold for phasing out the exemption amount would also be increased. Currently, the phase-out for joint filers starts at $160,900, while for other filers it starts at $120,700; these amounts would be increased to $1 million and $500,000 respectively. For every dollar of income that exceeds the threshold, a household loses $0.25 of its exemption. The conference’s levels of agreement are significantly higher than what the Senate amendment outlined, indicating a compromise with the House version that would have eliminated the individual AMT altogether.
The conference agreement also specifies that the exemptions and phase-outs would be increased by cost-of-living adjustments beginning after 2018, using 2017 as the base year.
These changes will significantly limit the number of people affected by AMT over the next decade. In total, the Joint Committee on Taxation estimated that these changes would reduce federal revenue by $637.1 billion over the next decade, compared to the current law.
Another aspect to consider is how the AMT will interact with other changing provisions, such as the increase in standard deduction, new rate schedules, and limitations on itemized deductions, including mortgage interest and property or income and sales taxes. A larger standard deduction combined with limited itemized deductions makes it more likely that more households will benefit from simply taking the standard deduction, making them less likely to be liable for AMT.
Currently, high-income households in high-tax states and localities are much more likely to pay AMT. By simultaneously limiting the value of the state and local tax deduction and the mortgage interest deduction and increasing the AMT exemption level, fewer households earning between $200,000 and $500,000 will owe the AMT. Since the exemption will not begin to disappear until the minimum replacement taxable income exceeds $1 million, under the proposed changes, households above that level will have to pay a greater share of the AMT.
Ultimately, the combination of a higher exemption and a higher elimination threshold will result in fewer households incurring AMT liability and for those who still owe the liability will likely be smaller. . However, unless extended by a future Congress, these changes will expire on December 31, 2025. The goal of the alternative minimum tax, ensuring that households do not benefit too much from itemized deductions, would be best achieved by simplifying ordinary tax code, thus making an alternative tax code unnecessary. However, the AMT was presumably held back in a compromise to keep the bill under the $1.5 trillion revenue loss limit guiding the negotiations, meaning the conference agreement preserved the individual AMT for raise revenue to pay for cuts elsewhere.
