Nothing excites taxpayers quite like the alternative minimum tax, commonly known as the AMT.
This separate tax was created to ensure that certain high-income taxpayers got their fair share. In recent years, however, it has applied to many middle- and upper-middle-income filers, experts say. The good news this year is that fewer taxpayers will have to wrestle with the AMT when filing their 2018 tax returns. according to Tax Policy Center. This is due to a double whammy on AMT’s liability: new limitations on certain deductions and higher income limits for those subject to tax.
“We’re going to have very, very few clients paying AMT this year,” says Lawrence Pon, a tax practitioner who owns an accounting firm in San Francisco. In his practice, Pon says, the clients who will pay this tax will primarily be those who exercise incentive stock options, a kind of company stock offered to key employees.
If you’re wondering if you owe the AMT this year, there are some important tax planning strategies and concepts you should know. Read on for the answers to these questions:
- What is the alternative minimum tax?
- Who pays the alternative minimum tax?
- What are the alternative minimum tax rates?
- How can I avoid the alternative minimum tax?
What is the alternative minimum tax?
The Alternative Minimum Tax, or AMT, is a separate income tax designed to ensure that high-income taxpayers do not dodge appropriate levels of tax payment by claiming too many deductions. “As the name suggests, it’s basically another way to calculate your tax liability,” says Logan Allec, CPA and creator of the Money Done Right financial website.
In practice, the AMT obliges certain filers to add back various deductions or count certain sources of income that are not necessary when calculating regular taxable income. Items that must be added back include state and local income tax and personal property tax deductions. Filers may also need to count incentive stock options, certain tax-exempt interest, and other financial sources to calculate what is owed under the AMT.
“It’s a second tax system, it’s a flat tax and it’s done alongside the regular tax,” says Pon.
Although the calculation is complex and varies depending on an individual’s tax situation, the idea is that some taxpayers who owe more under the AMT than under the regular income tax calculation must pay the higher of the two. The tax form associated with the AMT is form 6251and a good tax preparer or sturdy tax software can also help you calculate this tax.
Who pays the alternative minimum tax?
Although your exposure to AMT is largely determined by your unique financial situation, not everyone needs to worry about it. If your regular taxable income, combined with certain AMT-specific adjustments, does not exceed a particular limit or “exempt” amount, you will not pay AMT. This number works much like the standard deduction, but for the AMT.
You may have to pay AMT if your 2018 adjusted gross income, plus AMT adjustments, exceeds these amounts:
|head of household||$70,300|
|Groom filing separately||$54,700|
|Married filing jointly||$109,400|
Since these exemption amounts are significantly higher than they were the previous tax year, experts believe that fewer filers will be affected by the AMT this year.
Although incomes below these thresholds are exempt, the exemption begins to “disappear” at 25 cents per dollar earned once filers reach certain adjusted gross income thresholds. These AMT phase-outs for 2018 earnings are:
|Filing status||Phasing out the exemption|
|head of household||$500,000|
|Groom filing separately||$500,000|
|Married filing jointly||$1 million|
Again, these amounts are higher than they were in recent previous tax years, which affects the exposure of high-income filers to this alternative tax.
What are the tax rates for AMT?
There are only two tax brackets to calculate your tax bill under alternative minimum tax. For married persons filing jointly, single persons and heads of household, the first $191,500 is taxed at a rate of 26% ($95,750 if married persons file separately). Above this, income is subject to a tax rate of 28%.
|Filing status||AMT tax rate of 26%||AMT tax rate of 28%|
|Only||AMT income up to $191,500||AMT income over $191,500|
|head of household||AMT income up to $191,500||AMT income over $191,500|
|Groom filing separately||AMT income up to $95,750||AMT income over $95,750|
|Married filing jointly||AMT income up to $191,500||AMT income over $191,500|
How can I avoid the alternative minimum tax?
Although fewer filers will be affected by the AMT this year, taxpayers should still plan ahead to ensure they make the best tax planning decisions to lower their tax bill. Taxpayers may aim to move deductions into a year in which the AMT does not apply in order to take full advantage of these write-offs. Other taxpayers may time certain financial movements that impact AMT exposure, such as when exercising incentive stock options, to reduce their liability. Filers who generally fall into a higher tax bracket, which can reach a marginal rate of 37% on ordinary income earned in 2018, can even recognize additional income in a year in which they pay tax. ‘AMT to capture the lower rate of 28%.
If you have a complex tax situation and are concerned about incurring this parallel tax, talk to your tax professional.
Remember that filers who paid alternative minimum tax in previous years can carry forward an AMT credit to reduce their tax bill in a year in which they pay ordinary income tax. . The math is complex, but it’s worth taking copies of your tax returns from previous years to your tax professional to see if you qualify for this credit. “The takeaway is this: If you change tax preparers this year, you need to provide them with the last few years’ tax returns, so we can get the rollover,” Pon says.