You’ve likely heard of the alternative minimum tax, or AMT, but what you might not know is how it factors into your tax return under the new tax law. Donna Cuiffo, CPA and tax partner at Clarfeld Financial Advisors, explains the implications of the AMT for taxpayers under the new law.
“In the past, most people who earned between $200,000 and $1 million were the largest percentage of people who were subjected to the AMT tax because of deductions such as state deductions, real estate deductions,” Cuiffo says.
The AMT was designed to prevent taxpayers from escaping their tax liability through tax deductions.“The AMT is a second tax,” Cuiffo says. “You have to calculate it alongside the standard tax, and you pay the higher of the two.”
“It requires some taxpayers to calculate their liability twice—once under the rules for the regular income tax and once under the AMT rules—and then pay the higher amount,” according to the Tax Policy Center.
The TCJA implemented a higher AMT exemption and a big increase in the income at which the exemption begins to phase out. Exemption guidelines can be found on the Tax Foundation’s website. The new tax law also limits SALT deductions to $10,000 ($5,000 for a married taxpayer filing a separate return) for all state and local taxes paid in a tax year. Because of this cap, taxpayers’ AMT calculation is less likely to be higher than their standard tax liability. Therefore this year, Cuiffo says, “the AMT pool has shrunken to a very small percentage.”
There are a few exceptions that could put you in that small percentage. These include income that is not subject to regular tax purposes but is subject to AMT purposes, such as “incentive stock option exercises that were exercised but not sold, or special bond interest from private activity bonds, and a lot of it,” Cuiffo says. These types of income must be factored into the AMT calculation.
For most people, though, Cuiffo says the AMT will no longer be a concern.
The AMT affected about 5 million filers in 2017, and the Tax Cuts and Jobs Act reduced the reach of the AMT (however, temporarily) so that the tax will hit only 200,000 filers in 2018, according to the Tax Policy Center.
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