Now we briefly tackle the impact of Alternative Minimum Tax (“AMT”) in general and how it will change under the new tax law.
AMT originated in the mid 1960’s in order to prevent wealthy taxpayers from using deductions to whittle down their tax liability. AMT removes the benefit of many tax deductions ranging from medical expenses to State and Local Income Tax (including property taxes). At first, AMT may have targeted the appropriate taxpayer group but, unfortunately, it quickly began impacting a broader group of unintended taxpayers because the income level for its application was not tied to inflation. This problem grows each year and victimizes a great number of middle-income families.
Many taxpayers may not even know that they are hit with additional AMT taxes since the calculation of this additional tax takes place on its own IRS Form 6251 appearing on one’s individual IRS Form 1040 on one line (Line 45 for 2016 IRS Form 1040). However, more and more taxpayers are unsuspectingly falling into AMT each year.
Because of AMT, many high-income earners have not benefited from any local state and income tax deduction at all. Ironically, many taxpayers that think they will be disadvantaged by the new $10,000 limitation on the state and local income tax deduction under the new tax law may not have lost their state and local income tax deduction under AMT in the past years anyway.
The Tax Cuts and Jobs Act (“TCJA”) has modified AMT thresholds in order to narrow its application. Many taxpayers that have fallen into AMT in the past may now find that their taxes will decrease because of the new tax law modifications to AMT:
The new tax law exempts significantly more income from AMT. Under the old law, single filers could exempt $54,300 and married couples filing jointly could exempt $84,500. The new law increases these exemptions by almost a third to $70,300 and $109,400, respectively.
Further, new modifications increase the income threshold before phasing out these exemptions for AMT. Under the old law, phase-outs for single filers would have been $120,700 and for married couples filing joint, the phase-out would have been $160,900 in 2018. Under TCJA, these income phase-outs have been increased to $500,000 for single filers and $1 million for married couples filing jointly. So, many more taxpayers will benefit from the exemptions in #1 above.
While this basic discussion helps to identify some misunderstandings surrounding AMT, it is important to discuss your specific tax situation with your tax expert so that all of your tax positions are taken into account.
Thanks for joining us in this series of six articles!