With the first tax filing under the Tax Cuts and Job Act right around the corner, there are many changes taxpayers will be seeing in action for the first time. One thing you might not be hearing so much about this year is the Alternative Minimum Tax (AMT).
The AMT is a parallel tax system that requires you to calculate your tax bill under the regular income tax code then under the AMT rules and pay the higher of the two. The AMT was originally put in place back in 1969 when it was discovered that about 150 households had taken advantage of so many tax deductions that they actually owed no tax. The AMT had not changed much until the recent tax law change and as a result it was estimated over 5 million taxpayers paid the AMT in 2017.
In 2018 the number of taxpayers that will pay AMT is expected to be about 200,000. There are three primary reasons for the dramatic decrease in AMT taxpayers.
1. Higher Exemption Amounts
The first reason you might not have to pay AMT is the amount of income that is exempt from AMT has increased, as illustrated below.
|Married Filing Jointly||$84,500||$109,400|
2. Higher Exemption Phaseouts
Previously under pre-2018 law you would lose the above exemption after you crossed a certain income threshold and that income threshold was pretty low. For instance, a couple that was Married Filing Joint would lose their AMT exemption of $84,500 once they surpassed $160,900 in income. Under the 2018 law the exemption amount has increased to $109,400, but more importantly is that exemption stays intact until that couple exceeds $1,000,000 of income.
|Married Filing Jointly||$160,900||$1,000,000|
3. Fewer Deductions
The biggest reason that people previously found themselves paying the AMT is that they had too many deductions under the normal tax calculation, which, remember, was the original intent of the law. The AMT calculation would add back some of those deductions, increasing the amount of income taxable under the AMT calculation. Under the new tax code many of those deductions are no longer available or are capped. Other “add back” items include State and Local Taxes, which is now capped at $10,000, and miscellaneous deductions, the latter which was entirely eliminated under the new tax law.
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