The Must-Knows of Tax Reform and Alternative Minimum Tax
The Tax Cuts and Jobs Act (TCJA) made several changes to the Alternative Minimum Tax, or AMT.
A Background on Alternative Minimum Tax (AMT)
To understand the significance of the TCJA changes, first, here are some AMT basics. Here are five facts about it:
- As the name suggests, the AMT is a different way of calculating income taxes. Different, that is, from the “regular” way of calculating tax.
- The AMT starts with regular taxable income and applies its own system of “adjustments” and “preferences” (calculations that add more income to or remove deductions from regular taxable income) to arrive at AMT taxable income. Next, an AMT exemption is subtracted and AMT tax rates are applied to get to tentative minimum tax.
- If tentative minimum tax is more than regular tax, the taxpayer pays the difference as AMT. For instance, if a taxpayer’s regular tax is $15,000 and tentative minimum tax is $17,000, the taxpayer would pay the $2,000 of AMT. On the other hand, if tentative AMT is $15,000 or less, the taxpayer would not pay AMT. Just as with regular tax, AMT for individuals, corporations (before 2018), and estates and trusts have their set of AMT adjustments, preferences, exemptions, rates, credits, etc. but all operate similarly to get to tentative minimum tax and compare it to regular tax.
- The first minimum tax was introduced in 1970 following concerns that 155 wealthy taxpayers were using various tax breaks to avoid paying any tax at all. The AMT has changed considerably over the years but its purpose has always been the same: to ensure that reasonably well-off taxpayers pay at least some amount of income tax.
- Despite inflation adjustments, AMT credits, and other “fixes” in various tax laws, the AMT has hit more and more taxpayers since its beginnings. In 2016, the IRS estimates that $4.5 million individual taxpayers paid AMT. For more information on AMT history and how the AMT works, see the Tax Policy Center’s Briefing Book.
Alternative Minimum Tax & Individuals
Exemption amounts and exemption phaseout thresholds (effective 2018 through 2025): The TCJA has made the following changes to the individual AMT.
- Increases the AMT exemption amount from $55,400 (the pre-TCJA amount scheduled for 2018) to $70,300 (from $86,200 to $109,400 for joint filers).
- Increases the AMT exemption phaseout threshold (the point where the exemption is decreased for those with higher AMT taxable income) from $123,100 to $500,000 (from $150,000 to $1 million for joint filers).
- The exemption amounts and phaseout thresholds will be adjusted for inflation after 2018. However, these adjustments will be based on the “chained CPI” which is a slower rate of adjustment than under pre-TCJA law.
Note: Amounts for married taxpayers filing separately are one half of those for joint filers. Also, the TCJA did not change the AMT exemption amount for taxpayers who are subject to the “kiddie tax.” For 2018, the kiddie tax AMT exemption is equal to earned income plus $7,600.
Although the TCJA did not change AMT adjustments, preferences, and rates, because of the TCJA’s increased AMT exemptions and higher exemption phaseout thresholds, fewer individual taxpayers will have to pay AMT 2018 through 2025. Absent additional legislation, the individual AMT will revert to pre-TCJA law in 2026.
Net disaster losses (effective 2016 and 2017): For 2016 and 2017, legislation allowed taxpayers who didn’t itemize deductions to add net disaster losses to their standard deduction. Qualified losses are those from Hurricanes Harvey, Irma, and Maria in 2017 and all hurricanes in federally declared disaster areas in 2016. Although the regular standard deduction is not allowed for the AMT, another provision of the TCJA allows affected taxpayers to deduct the loss-related portion of the standard deduction for the AMT on 2016 and 2017 returns. The result is that taxpayers with a large hurricane loss will not wind up having the loss disallowed for AMT.
Corporations (permanent change): The TCJA permanently repeals the corporate AMT starting with tax year 2018. Unused corporate minimum tax credits from earlier years may be carried forward and used up as refundable credits. The credit balance carried forward from 2017 is refundable at 50% 2018 through 2020 and the remaining balance is refundable in 2021.
Estates and trusts (2018-2025): The TCJA does not change the estate and trust AMT exemption and exemption phaseout thresholds, which were $24,100 and $80,450 respectively for 2017. However, these amounts will be inflation adjusted using the lower chained CPI starting in 2018 through 2025. The inflation-adjusted amounts are $24,600 and $81,900 for 2018.
Confused as to how tax reform will impact you? Bring in your tax return to one of our Block Advisors locations, and at no cost, you will receive an analysis of how tax reform will impact you, a Second Look® Review, and suggestions on how to make appropriate W-4 adjustments to maximize your tax outcome.