Alternative Minimum Tax essentially eliminated

Many changes have come about as a result of the Tax Cuts and Jobs Act of 2017 (TCJA). Taxpayers are only now beginning to feel the effects of these changes as their 2018 tax returns are being prepared. One of the areas that has impacted numerous taxpayers historically that is no longer impacting nearly as many is the Alternative Minimum Tax (AMT).

AMT was originally implemented in 1969 as a way to ensure that high income taxpayers paid their fair share of income taxes, regardless of how many deductions they were entitled to.

The objective was to prevent high income taxpayers from shielding the majority of their income from taxes. Basically, taxpayers impacted by the AMT prepared two separate tax returns, a traditional income tax return and a second calculation utilizing the AMT rules. The taxpayer would then pay the higher of the two tax calculations.

The thresholds for AMT were not originally indexed for inflation.

As time went by middle and upper middleclass taxpayers began being subject to AMT. This was not the intent in 1969 when AMT came into being. In 2017 at our firm 15.7 percent of the individual returns included AMT to some magnitude. For 2018 so far we have had no returns subject to AMT.

The tax calculation under AMT requires taxpayers to add back certain deductions or count certain sources of income that are not required when calculating the regular taxable income.

Items that must be added back for AMT purposes include state and local income tax deductions and personal property tax deductions.

Income from incentive stock options and tax-exempt income may needed to be added to income to compute the AMT taxable income.

Two things have occurred as a result of the TCJA of 2017 which have effectively eliminated AMT for all but a very few taxpayers.

The first change is that the AMT thresholds have been significantly increased. In 2017 these thresholds were $160,900 for joint filers and $120,700 for individuals, whereas in 2018 these thresholds are now set at $1,000,000 for joint filers and $500,000 for single filers.

With the lower thresholds previously in place you can see how middle-income households would be impacted, now with the substantial increase in the threshold you can see how only very high-income taxpayers will now be impacted.

The second change that eliminates AMT is that the items used to calculate the for deductions for AMT purposes will be closer to the itemized deductions used for standard tax calculations.

The elimination of the miscellaneous itemized deduction such as itemized business expenses, investment management fees combined with the elimination of the deduction for interest on home equity loans cause the AMT calculation to mirror the tax calculation under the standard tax rules.

In addition, the $10,000 limit for state and local income and real estate tax deduction effectively makes little to no difference in the tax calculation under the AMT as compared to the standard tax tables.

Unlike previous years where certain taxpayers could expect to be subject to AMT year in and year out, now it will more typically be a one-time occurrence. Those likely to pay the AMT are those that have an unusual event occur. One example would be exercising incentive stock options or winning a large lottery prize.

AMT continues to be very complicated, and it is really not possible to give general rules about who may be subject to AMT.

If a taxpayer is subject to AMT under the new tax laws, the taxpayer should be working with a CPA or tax professional to plan for these unique circumstances. In general, the likelihood of being subject to AMT has been significantly reduced if not eliminated.