3 Ways the Alternative Minimum Tax is Affected by The New Tax Reform

Alternative Minimum Tax (AMT), like its name infers, is a minimum tax applied to taxpayers. Currently, the tax code allows taxpayers to qualify for a lot of different deductions and credits. AMT ensures that high-income earners pay a minimum tax. It disallows high-income earners from using the available tax credits and deductions to reduce their tax bill by a drastic amount.

The Alternative Minimum Tax was enacted in 1982, but it followed a minimum tax that was enacted as early as 1969. AMT reduces or eliminates certain tax deductions and credits used in calculating the regular tax to calculate a minimum tax. AMT is due only if the minimum tax is greater than regular tax. This means taxpayers, who may have AMT apply, must complete their taxes twice: once normally with the regular tax, deductions, and credits; and a second time using the alternative minimum tax calculation method. If the Alternative Minimum Tax is higher, than the taxpayer owes that amount, not the lesser amount of the regular tax.

If you are one of the millions of taxpayers, to whom the Alternative Minimum Tax applies, the New Tax Reform of 2017 delivers some wonderful news. Three ways the Alternative Minimum Tax is affected by the New Tax Reform is by permanently indexing the exempted amount for inflation, increasing the exempted amount, and increasing the phase out thresholds for the exempted amount.

Exempted Amount Permanently Indexed for Inflation

When the Alternative Minimum Tax was enacted in 1982, the original amount exempted from the AMT was not adjusted for the cost of inflation. Although over the years Congress adjusted the exempted amount, it was not until 2012, the exempted amount was increased and indexed for inflation going forward. However, as the years passed and wages increased, AMT started to apply to more and more taxpayers, who it, originally, was not intended to effect, including middle class earners. The New Tax Reform permanently indexes the exempted amount for inflation going forward. This will eliminate this issue going forward, as the Alternative Minimum Tax, now, will increase each year based on the cost of inflation. This will ensure it applies to high income earners and does not arbitrarily start applying to the middle class.

Exempted Amount Increased

Starting in tax year 2018, the New Tax Reform increases the exempted amount for the Alternative Minimum Tax. The exempted AMT amount increases as follows:

  • single or head of household filers from $54,300 in 2017 to $70,300 in 2018;
  • married filing jointly filers from $84,500 in 2017 to $109,400 in 2018; and
  • married filing separately filers from $42,250 in 2017 to $54,700 (or half of the married filing jointly exempted amount).

With the exempted amount increasing by more than 25%, starting in tax year 2018, the Alternative Minimum Tax will apply to fewer taxpayers.

Exempted Amount Phase Out Threshold Increased

In 2017, the exempted amount was phased out for taxpayers making more than $120,700 (single filers) or $160,900 (married filing jointly filers). Under the New Tax Reform, the exempted amount is not phased out until the taxpayers’ alternative minimum taxable income exceeds $500,000 (single filers) and $1,000,000 (married filing jointly filers). This helps ensure that AMT applies, as it was intended, to high income earners, not the middle class.

A Final Note

With many tax deductions eliminated or reduced with the New Tax Reform, including personal exemptions, state and local taxes, mortgage interest, home equity line of credit interest, and miscellaneous deductions, the Alternative Minimum Tax will apply to fewer taxpayers in 2018, because their regular tax will be the same or exceed their applicable AMT amount. Unfortunately, the process to determine if AMT applies to you has not been made simpler with the new reform. The only way to know if the Alternative Minimum Tax applies to you and your individual tax situation is to complete your taxes twice: once, normally, using the regular tax and a second time, using the Alternative Minimum Tax. Whichever amount is higher, either the regular tax or AMT, is the amount you owe. If the AMT is higher, than it applies, and you are required to pay it.

If you do not complete your taxes correctly, the fees and penalties can add up over time. Often, the IRS does not find errors for 2 – 3 years, and the IRS can go back in most circumstances up to 7 years. The interest starts applying from the date the taxes were due and should have been paid, not the date the IRS finds the error. This means by the time the IRS sends you the letter letting you know the amount of additional tax you owe for a given year, you could owe years in interest, plus penalties. Make your taxes are completed correctly the first time, contract the tax preparation professionals at Gudorf Tax Group and schedule an appointment today.