The How, What & Where Behind the Disappearance of the AMT

With the 2018 tax return season around the corner, get excited…It’s nearly time to get started with your favorite paperwork: taxes.  In hopes that tax reform will reward diligent taxpayers with a higher return amount, many are eager to file their returns and see how tax reform has affected their income. Because this is the first year that tax reform regulations have gone into effect, Americans are looking for and what, if any, difference tax-filers will notice in a year-by-year comparison using historical data.  

If you have had the great fortune of being on the higher-end of the income scale, the huge change represented by the disappearance of the alternative minimum tax, (also known as the AMT) could lead to even greater fortune.  According to the current Republican administrations, ideally, many people will be thanking the Tax Cuts and Jobs Act (TCJA) for alterations to the AMT, or future lack thereof.  The new AMT rules now reduce the odds that you’ll owe the AMT for 2018 through 2025. Plus, even if you’re still in the AMT zone, you’ll probably owe less AMT than you did under the old rules.

Some Essential Alternative Minimum Tax Info

Seen in many forms, over the most part of the four past decades, especially when taxation rates were astronomical, there were many provisions that guaranteed credits and deductions that many used to circumvent the tax. The AMT was a government taxation device enacted to ensure that no party could avoid absolutely all taxation, which was exponentially turning into a problem because of all the tax loopholes that high-earning taxpayers used to shelter income from tax collection by the IRS.

What the AMT did was develop a parallel tax system of sorts in which rates were much lower than the corresponding regular tax rates; however, it offered way less deductions and tax breaks. 

Tax-filers needed to calculate their taxes using the traditional method and the AMT method and remit payment to the IRS for whichever amount was higher.

At the same time, the law which enacted the AMT designated that the income thresholds and tax exemptions did not automatically adjust upward annually to compensate every year for inflation. This “oversight” meant that, in future years, more individuals and joint filers had to pay the AMT as time passed.

In recent years, legislators began utilizing annual boosts to AMT exemption amounts to thwart the AMT from slamming even more taxpayers. Said increases were deemed permanent several years ago, but still…even some middle-income taxpayers wound up paying the AMT.

If you reference the small chart above, you will see that just a few lines of data speak volumes.  Look at the threshold increase for 2018 income- it’s enormous! Essentially, it pretty much discarded the primary culprit for upper-middle-earners angst in having to pay the AMT by eliminating higher effective marginal rates for the AMT and no regular taxation rates.  Prior law dictated that the earnings the phaseout area were levied the AMT at an effective rate of 32.5% to 35%, which was substantially higher than the 25% to 28% rate that applied under regular tax rules. As it stands now, phase out primarily occurs in the 35% and 37% tax brackets; this means a far greater portion of the population will not be subject to the AMT.

How did the TCJA Change the AMT?

In the beginning, many lawmakers sought complete and total elimination of the AMT; and, that is exactly the outcome that was rendered on corporate filers. On the non-corporate side, legislators introduced a law that was quite inventive and smart, considering the past.  Lawmakers allowed the AMT to remain, in part and in theory, as law but more than substantially lowered its impact. The Tax Cuts and Jobs Act of 2017 raised personal AMT exemption levels and exemption phase-out levels, but eliminated several itemized deductions. The TCJA also indexed the AMT exemptions for inflation in years after 2018. The changes are projected to reduce the number of taxpayers affected by AMT in 2018 and beyond

One of the several mechanisms utilized to garner such a result was the increase of threshold exemption amounts,  permitted under the tax, ensured that a raised minimum income was essential prior to tax filers being subject to the AMT. As dictated by the IRS, you can reference the simple chart below to view and familiarize yourself with exemption amounts for 2017, 2018 and 2019:

Enormous increases of $16,000 and $24,900 from 2017 to 2018 exponentially raised the amount of income subject to the AMT.

However, higher-earners are really the beneficiaries here because they are the only people who really got assessed the AMT.  Of importance is the phaseout associated with the AMT. And actually, the AMT exemption does provide phaseouts for those making above certain income bars, and, should you earn higher than the applicable threshold amount, you will take a loss of  $1 in AMT exemptions for every $4 you earn above the designated income level. 

Will You Pay the AMT?

Even though it is not as costly as it was in the past, it is still not completely done away with.  For example, the AMT continues taxation on select bands of earnings which are deemed tax-free under normal tax rules.  And, sad some taxpayers for whom that state of affairs will remain in place.

There is still some very large positive;  the reasons for AMT liability derived from the AMT doesn’t allow any deduction for state and local taxes. Yet with the regular tax system now limiting certain itemized deductions to just $10,000 per year, this makes it less likely that even high-income earners will get caught with having large differences between both tax systems. 

The odds are very good that you’ll never have to pay the alternative minimum tax again under the new tax reform rules. It’ll take special circumstances for the AMT to snare anyone within its grasp.

Conclusion

Thomas Huckabee, CPA of San Diego, California recognizes that many options exist when it comes to choosing the right CPA. And, the right CPA is essential and needed to guide your business through all the new legislation that has been introduced.  Operating a full-service accounting firm, Tom also guides clients through the complicated process of how new AMT legislation ramifications affect your business.

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