The Tax Cuts and Jobs Act of 2017 made many changes to the individual tax law, including many changes affecting alternative minimum tax, or AMT. The Act significantly increased AMT exemption amounts along with the associated phase-out thresholds. With the Act’s changes to the regular income tax brackets, a taxpayer is less likely to owe alternative minimum tax on their upcoming tax returns.
What is AMT?
High earning taxpayers can often reduce their regular income taxes with the many tax benefits available to them. To ensure that taxpayers with higher incomes pay at least a minimum amount of tax, the alternative minimum tax sets a limit to those benefits by either disallowing regular tax breaks or taxing certain types of income that would normally be tax-free under the regular income tax. Some limits include the taxation of private activity bonds or small business stock that would normally be exempt from regular tax.
How is AMT Calculated?
AMT is the excess of the tentative minimum tax over the regular tax. To calculate tentative minimum tax, a taxpayer must first determine alternative minimum taxable income (AMTI). The AMTI begins with regular taxable income and is then modified to include various AMT adjustments and preferences. Once the AMTI is calculated, taxpayers can receive large exemption amounts to reduce their income from AMTI; however, the exemption amount will phase out at certain AMTI levels. The difference between AMTI and the exemption amount is then multiplied by the appropriate AMT rate, 26% or 28%, to achieve the tentative minimum tax.
The Tax Cuts and Jobs Act of 2017 temporarily increased the income exemption amount from $54,300 to $70,300 for single or head of household filers, and from $84,500 to $109,400 for married individuals filing jointly or surviving spouses. The exemption amount increased to $54,700 for married individuals filing separately.
The threshold amounts for phase-out or reduction of the AMT exemption amount are also temporarily increased after 2017. The phase-out threshold is $1 million for married individuals filing jointly or surviving spouses, and $500,000 for single, head of household, and married filing separately. This means the AMT exemption will phase out completely once the AMTI reaches $1,437,600 for taxpayers who are married filing jointly or surviving spouse, $781,200 for single or head of household filers, and $718,800 for married filing separately. Both AMT exemption amounts and phase-outs will be adjusted annually for inflation.
Moreover, miscellaneous itemized deductions, which were added back when calculating AMTI, is completely eliminated under the Tax Cuts and Jobs Act. Additionally, state income taxes or real estate/property tax deductions, which were another AMT addback, are capped at $10,000 under the new tax law. Both changes will further reduce taxpayer’s AMTI, which likely translates to less taxpayers being subject to AMT.
If you would like to know more about how AMT may impact your tax liability, or need advice on your overall tax planning, please contact your L&B professionals at (858) 558-9200.