Unfortunately, the dreaded alternative minimum tax (AMT) still exists after the Tax Cuts and Jobs Act (TCJA). The good news: the TCJA made the AMT rules more taxpayer-friendly for 2018-2025, and other TCJA changes reduce the odds that you’ll owe the AMT for those years. Even so, you may still benefit from making moves to avoid or minimize the tax. Here are some ideas after first covering the necessary background information.
AMT Basics
The AMT is a separate tax system with a family resemblance to the regular federal income tax system. The difference is the AMT system taxes certain types of income that are tax-free under the regular tax system and disallows some regular tax breaks.
AMT Rates
The maximum AMT rate is “only” 28% versus the 37% maximum regular tax rate for 2018-2025 under the TCJA.
For 2018, the 28% AMT rate kicks in when AMT income exceeds $191,500 for married joint-filing couples and $95,750 for others.
If your AMT bill for the year exceeds your regular tax bill, you owe the higher AMT amount.
AMT Exemptions
In calculating your AMT income, you are allowed to subtract an inflation-adjusted AMT exemption. The exemption is phased out when your AMT income surpasses the applicable threshold. For 2018-2025, the TCJA increases the exemption amounts and greatly increases the phase-out thresholds.
For 2018, the exemptions are $109,400 for married joint-filing couples, $70,300 for unmarried individuals, and $54,700 if you use married filing separate status. The respective phase-out thresholds are $1 million, $500,000, and $500,000.
Your exemption is reduced by 25% of the excess of AMT income over the applicable phase-out threshold. But under the liberalized rules for 2018-2025, only truly high-income folks will see their exemptions phased out while middle-income taxpayers will benefit from full exemptions.
AMT Risk Factors
Various interacting factors make it difficult to pinpoint exactly who will be hit by the AMT and who will escape. That said, here are the most common risk factors under prior law and how the TCJA changes affect them:
• Substantial income from whatever source. High income can cause your AMT exemption to be partially or completely phased out, which increases the odds of owing the AMT. While this risk factor still exists, it has been substantially diminished for 2018-2025 by the TCJA’s changes to the AMT exemption rules.
• Large itemized deductions for state and local income and property taxes. Deductions for these taxes are disallowed under the AMT rules. For 2018-2025, the TCJA limits regular-tax itemized deductions for state and local taxes to only $10,000, or $5,000 if you use married filing separate status. Because large itemized deductions for these taxes are not possible for 2018-2025, this risk factor is substantially diminished for now.
• Several dependent kids and therefore quite a few personal and dependent exemption deductions. These deductions are disallowed under the AMT rules....