Why 2017 might be the last year you owe an alternative minimum tax
Taxpayers just got a big alternative minimum tax break in the new reform laws.
The alternative minimum tax has evolved from being an isolated tax that only the ultra-wealthy paid to a burden on millions of Americans. Not only does the AMT require you to do a completely different set of calculations to figure it, but it can also add thousands of dollars to your tax bill.
Fortunately, tax reform just made major changes to the alternative minimum tax that could prevent many individual taxpayers from having to pay the tax ever again. Nevertheless, old rules are still in place for the 2017 tax returns that you're preparing right now, and so you still might have to try to dodge the AMT bullet one last time. Let's take a closer look this much-hated tax.
The history of the AMT
The idea of the alternative minimum tax was to make it so that no high-income taxpayer could use so many tax breaks that he or she ended up paying no tax at all. In its current form, the AMT has been around for about 35 years, and in the early 1980s when it was established, the high tax brackets on upper-income earners made finding deductions extremely lucrative for tax savings.
For a long time, though, key provisions of the AMT weren't indexed to account for rises in inflation. That led more people to have to owe AMT, even among those considered upper-middle class rather than the truly rich.
Moreover, certain people are more likely than others to have to pay AMT. The biggest difference between AMT and regular tax rules is that you can't take an itemized deduction for state and local taxes under the AMT, and so those who live in high-tax states are more likely than others to owe the additional tax. In addition, the AMT doesn't have personal exemptions for taxpayers and their dependents, and so those with bigger families often ended up being disproportionately represented in paying the tax.
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How tax reform affected the AMT
For a while, some lawmakers were calling for the full repeal of the alternative minimum tax. That's what happened on the corporate side, but Congress and President Trump kept the AMT in place for individuals.
However, the changes that lawmakers made to the AMT went a long way toward removing its sting. In particular, two aspects of the AMT made it easier for people to avoid the tax:
- Exemption amounts went up.
- The income limits above which those exemptions start to phase out rose dramatically.
For middle-income taxpayers, the first of these moves was more important. Exemption amounts for singles will go up to $70,300 in 2018, higher by $16,000 from 2017 levels. Joint filers will see a nearly $25,000 boost to $109,400.
Yet the second change is a bigger deal to many of the upper-middle income and wealthier taxpayers who pay AMT. Under old law, phase-outs used to start for singles at $120,700 in income, and for joint filers at $160,900. For every $4 you made above the threshold, you lose $1 of AMT exemption. Now, the phase-outs are $500,000 and $1 million respectively. You can see below the impact that has on higher-income taxpayers being able to use that exemption amount.
If you earned | Then your AMT exemption for 2017 would be | But your AMT exemption in 2018 will be | Difference |
$200,000 | $34,475 single / $74,725 joint | $70,300 single / $109,400 joint | $35,825/$34,775 |
$300,000 | $9,475 single / $49,725 joint | $70,300 single / $109,400 joint | $60,825/$59,775 |
$400,000 | $0 single / $24,725 joint | $70,300 single/ $109,400 joint | $70,300/$84,775 |
$500,000 | $0 single / $0 joint | $70,300 single/ $109,400 joint | $70,300/$109,400 |
Calculations by author.
With AMT tax rates of 26% and 28%, the impact is potentially thousands or even tens of thousands of dollars in savings simply from not having the AMT exemption phase out. As a result, most of those who were paying the alternative minimum tax before will find that their AMT liability is lower than their regular tax bill, and so they'll just pay the regular amount going forward.
(Almost) no more AMT
Finally, some of the changes that tax reform made to the original tax system brought it more in line with the AMT. For instance, new limits on state and local tax deductions to $10,000 will take away what for many high-income taxpayers was a big source of alternative minimum tax liability.
The AMT isn't entirely gone. But for most of those who have owed in the past, 2017 will be the last year you have to deal with it. That's good news for everyone who's been tired of having to do two separate tax calculations only to find that the end result was having to pay even more tax than they already thought they owed.
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