Question

What is AMT? How has the role of AMT changed for individual income taxes over the last few years? Why are individuals finding themselves more subject to AMT today than they have in the past? How does AMT affect businesses?

Answer 1

The Alternative Minimum Tax is a mandatory alternative to the standard income tax. It gets triggered when taxpayers make more than the exemption and use many common itemized deductions. The reason the AMT catches those in higher tax brackets is because it eliminates many of those deductions. That's the annoying part about the AMT. If you make more than the AMT exemption amount and use the deductions, you've got to calculate your taxes twice.

That's once for the regular income tax, and once for the AMT. To add insult to injury, you've then got to pay the higher tax bill.

On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act. It keeps the AMT, but raises the exemption and phaseout levels from 2018 through 2025. As a result, it will affect 200,000 tax filers instead of the 5 million affected in 2017. The bill includes an automatic cost of living adjustment. Congress eliminated the AMT for corporations.

How the AMT Works

The AMT is different from the regular tax rate because it doesn't have the standard deduction or personal exemptions. It also doesn't allow popular itemized deductions. These include state and local income taxes, foreign tax credits, and employee business expenses. It doesn't allow the interest on home equity mortgages, unless it was used to improve your home. Real estate and personal property taxes are not deductible.

Neither are medical expenses.

You also must file if you claim the qualified electric vehicle credit (Form 8834), the personal use part of the alternative fuel vehicle refueling property credit (Form 8911), or the credit for prior year minimum tax (Form 8801).

The AMT might also include other income streams not counted by the regular income tax.

For that reason, the AMT tax is higher than the regular tax.These include

The fair market value of incentive stock options that were exercised but not sold.

Otherwise tax-exempt interest from private activity bonds.

Foreign tax credits.

Passive income and losses.

Net operating loss deductions.

Fortunately, the AMT tax rate is simpler than the regular tax rates. There are only two tax rates: 26 percent and 28 percent. The tax rate is 26 percent on income below the AMT threshold, and 28 percent above it. For the 2017 tax year, the threshold is $187,800 of AMT taxable income, or $93,800 for those who are married filing separately. In 2018, the threshold increases to $191,500 for taxpayers filing as single and married joint. It is $95,750 for married filing separate.

The AMT exemption is much larger than the standard exemption. But it starts to disappear after you reach a certain income level, called the phaseout. Once your income hits the phaseout level, $0.25 of the exemption disappears for every dollar above the phaseout.

Who Has the Pay the AMT

You only have to worry about the AMT if your adjusted gross income exceeds the exemption. If you make that income or above, that's the AMT taxable income. You may have to calculate the AMTI and pay the higher tax. You can do so on Form 6251. Your tax software package will also do it for you. You can also go to the IRS AMT Assistant.

Once you qualify for the AMT in a tax year, you must pay it. But you can adjust your spending to reduce the AMT for next year. There are four common methods.

If you are an employee, get your company to reimburse you if at all possible.

Make sure your state tax withholding isn't higher than your expected payment. State tax payments aren't deductible under the AMT.

Pay your property taxes only when they're due. Don't prepay your next installment by the end of the year.

Sell exercised incentive stock options in the same year you exercise them. If you exercise the options, but don't sell, the value of the exercised options becomes income for AMT purposes.

How It Affects the U.S. Economy

Why didn't Congress eliminate the unpopular Alternative Minimum Tax, as Trump promised? Our elected officials can't turn down the additional revenue. The AMT produces around $60 billion a year in federal taxes from the top 1 percent of taxpayers. For that reason, it is a progressive tax.

There are many reasons to dislike the alternative minimum tax, which President Donald Trump has proposed to repeal in his current tax plan. But repealing the AMT may be just as bad as keeping it.

For one thing, it would contribute to a significant federal budget shortfall, and for another, its repeal may have unpleasant unintended — and intended — consequences to affected taxpayers.

The ostensible goal of the individual AMT is to prevent wealthy taxpayers from paying little to no federal tax. The AMT is a separate tax system with its own rules governing treatment of income and deductions.

Repeal repercussions

"It's ironic, because if you look at his proposed tax plan, he is in effect leaving the AMT system in place," said Marianela Collado, CPA and CFP with Tobias Financial Advisors.

She explained that AMT income is calculated by taking total "taxable income" and adding back in the following deductions from Schedule A:

• Medical expenses in excess of 10 percent of adjusted gross income.

• State income and sales taxes.

• Miscellaneous deductions, such as tax preparation fees, investment management fees, etc.

  Similarly, the president's plan eliminates all tax deductions except charity and mortgage interest, "but that's what the AMT is already," she said. Furthermore, the plan calls for just three tax brackets, of 10 percent, 25 percent and 35 percent (higher than the highest 28 percent AMT tax).