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The Alternative Minimum Tax for Individuals is Here to Stay

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The Tax Cuts and Jobs Act of 2017 made numerous changes to individual taxation, including to the Alternative Minimum Tax ("AMT"). Unlike the AMT for corporations, which was repealed for tax years beginning after December 31, 2017, the individual AMT, which includes trusts and estates, is here to stay - at least for now.

There are several revamps to the individual AMT, however, that taxpayers should be aware of, and although the tax is permanent, these changes could potentially reduce taxpayers' chances of being subject to the AMT in the future.

What is the AMT?

The AMT is a separate tax system imposed in addition to a taxpayer’s regular tax, which comes with its own set of forms, rates, rules, and brackets. It was designed for taxpayers who have certain types of income that receive favorable treatment, or who qualify for certain deductions. The most common factors that subject taxpayers to AMT are:

  • State and local income taxes, including property taxes.
  • Personal exemptions and the standard deduction.
  • Miscellaneous itemized deductions.
  • Tax exempt interest income from specified private activity bonds.
  • Income from exercising incentive stock options.
  • Differences in tax basis of fixed business assets related to depreciation or sale of an asset.

How is the AMT Calculated?

  • Taxable income is recomputed based on income and deductions that are added or subtracted under the AMT tax system.
  • The AMT exemption amount is then subtracted from the taxpayer’s AMT taxable income (subject to phase-outs).
  • Next, AMT tax is calculated using the AMT tax rates below:
    • 26% - Applies to AMT taxable income of $187,800 or less for the 2017 tax year ($93,900 for married separate).
    • 28% - Applies to AMT taxable income over $187,800 for the 2017 tax year (over $93,900 for married filing separate).
  • AMT tax is then reduced by the taxpayer’s AMT foreign tax credit or Research and Development Credit, if any, for the tax year.
  • If the AMT tax is higher than the taxpayer’s regular tax, the taxpayer is subject to AMT.

AMT Exemptions and Phase-Outs before the Tax Cuts and Jobs Act

For tax year 2017 and for recent tax years prior, AMT exemptions and phase-outs were indexed for inflation. The following chart lists the AMT exemptions and exemption phase-outs for tax year 2017. The exemption phase-out thresholds are based on AMT taxable income.

Filing Status Exemption Amount Exemption Phaseout Begins when AMT Income is:
Single $54,300 $120,700
Married Filing Jointly $84,500 $160,900
Married Filing Separately $42,250 $80,450
Trusts and Estates $24,100 $80,450

AMT Exemptions and Phase-Outs under the new Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act temporarily increases the AMT exemption amounts and exemption phase-outs for tax years beginning after December 31, 2017, and before January 1, 2026. The following chart lists the increases in the AMT exemptions and phase-outs effective beginning January 1, 2018:

Filing Status Exemption Amount Exemption Phaseout Begins when AMT Income is:
Single $70,300 $500,000
Married Filing Jointly $109,400 $1,000,000
Married Filing Separately $54,700 $500,000

Note that the increased exemption and phase-out thresholds under the Tax Cuts and Jobs Act do not apply to trusts and estates. The amounts for trusts and estates will continue to be indexed for inflation each year.

As the charts above illustrate, the exemption amount and exemption phase-out thresholds for the individual alternative minimum tax have increased significantly under the new law. The increased AMT exemption amounts as well as the new limits on certain itemized deductions (i.e., state and local taxes) aim to subject fewer taxpayers to the AMT between years 2018-2025.

Marcum Observation

As a result of the new law, it is expected that many taxpayers, previously subject to AMT, will no longer be subject to AMT.

For more information on changes to the Alternative Minimum Tax for individuals, or other changes from the new Tax Cuts and Jobs Act, please contact your Marcum tax advisor.

 
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