The Alternative Minimum Tax (AMT) is an archaic tax law that was originally intended to make sure that high income earners were “paying their fair share.” As if the tax law was not complicated enough, the tax law experts thought it necessary to not only calculate your taxes once, but twice. The first time it is calculated through the regular methods (brackets, etc) and the second time through the AMT. Whichever is higher is the tax you pay.
For most high-income earners between 100,000 to 600,000 the AMT really impacted their tax situation. It would not be uncommon to have to send a $5,000 to $10,000 check once your taxes were filed and it was determined you were going to get hit with the AMT.
Now that the GOP tax bill has gone through, what does the AMT look like today? How does it impact your tax situation? We will take a look at exactly that, and allow you to be able to determine it’s precise impact on your finances.
AMT: The Basics
The new tax bill plan in full can be found here. The pertinent portion explaining the AMT can be found on page 668 through 675 of that PDF (or page 145 to 152 as written on the paper version inside the PDF). The title of this section is “Alternative Minimum Tax sec. 2001 of the House bill, sec. 12001 of the Senate amendment, and secs. 53 and 55-59 of the Code.”
Before we get into the changes let me explain some definitions that come along with understanding the AMT:
1. First: the AMT tax brackets. There are only two (unless you go above the phase-out income). For 2017, any income below $187,800 if filing married/joint ($93,900 if single) is taxed at 26%, any income in excess of this minimum is taxed at 28%. These adjust for inflation and should be similar in 2018 and beyond.
2. To figure out the numbers above you have to figure out your Alternative Minimum Tax Income (AMTI). This is different than your AGI because the AMTI allows for very few deductions.
3. The AMT exemption is the amount that you get to deduct from your AMTI. Law prior to the GOP tax bill passing had this number at $84,500 (married/joint) or $54,300 (single).
4. The phase-out is the AMTI above which you no longer get the AMT exemption. Before the GOP bill passing, this was the portion that hurt most high-income earners the most. The old law phased the AMT exemption (what you could take off your AMTI) at $160,900 (married/joint) and $120,700 (single).
5. Deductions not allowed under AMTI: miscellaneous deductions, itemized deductions (including state and local taxes), medical expenses, mortgage interest, the standard deduction, and others. Basically, you don’t get any.
What changes did the GOP Bill make to the AMT?
The house bill originally repealed the AMT completely (both the corporate AMT, which is not discussed here, and the personal AMT), but the senate decided to keep both. In the conference agreement, they agreed to get rid of the corporate AMT and compromised and made changes to the individual AMT that made it harder to qualify, but did not end up repealing it. What were those changes?
The exemption (which was $84,500 for married/joint and $54,300 for single) was increased to $109,400 for married/joint returns and $70,300 for all other tax payers. Again, this is the amount you get to deduct from your AMTI before you calculate how much AMT you owe.
This is a substantial increase, but honestly wouldn’t make much difference at all, except that the bill also increased the phase out limits (or the income above which you cannot apply the exemptions). The old phase out limits are mentioned above. The new tax bill raises these limits to $500,000 for individuals and $1,000,000 for married/joint.
How does this impact my take home pay?
Before, if you earned over the phase out limit, you were likely to get hit with the AMT. This is the same, but the limits have been raised substantially. Remember, the same following still applies: You pay the greater tax between the normal tax bracket system and the AMT. You can calculate your new federal tax utilizing various online calculators (I recommend this one at CalcXML).
Now, we need to calculate the AMT. Here is how that works.
1. Take your AGI and add back and deductions (mortgage, medical, personal exemptions, etc) above that are not allowed in the AMT. This is your AMTI (AMT income)
2. If you make less than $500,000 (single) or $1,000,000 married then you are below the phase-out and qualify to subtract the exemption listed above ($109,400 married or $70,300 if single) from your AMTI.
3. Take the number from number 2 to determine your AMT. Find single tax bracket numbers above if that is your situation. Any income from number 2 less than $187,000 (married) is at 26% tax bracket.
4. Any remaining income from number 2 above over $187,000 is taxed at 28%.
5. Add number 3 and 4. This is your AMT.
Here is an example. Let’s say that there is a married couple with no children filing a joint return who makes a total of $400,000 without any deductions. They make less than the $1,000,000 phase out and therefore qualify for the exemption. So, here is how their AMT calculation would work.
1. 400,000 with no deductions. This is the AMTI
2. They qualify for exemption. $400,000-$109,400 = $290,600
3. Income up to $187,000 at 26% = $48,620
4. Income remaining above this is $103,600, which is now at the 28% bracket = $29,008.
5. Total AMT due = $48,620 + $29,008 = $77,628.
For the couple above, this provides an effective tax rate through AMT of 19.41%. Under the prior tax law, their AMT would have been $108,260 or an effective rate through the AMT of 27%. This new law has provided a profound difference for this couple. Even if this AMT is higher than the federal tax, and they are still hit by the AMT, the new tax law saves them $30,632.
Even if this couple pays higher taxes through the AMT, they are likely to benefit because they are no longer excluded by the exemption.
I recognize that this is a rudimentary understanding, but I hope that it helps provide some knowledge into the nebulous AMT.
How much does the old law’s AMT impact you? Do you anticipate it effecting your taxes next year? Are you happy, sad, indifferent about the new tax plan?