Tax Law Adds Alternative Minimum Tax Relief

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The Alternative Minimum Tax (AMT) was originally enacted almost 50 years ago when Congress learned that 155 taxpayers with more than $200,000 in income ($1.5 million in today's dollars) paid no federal income tax. These taxpayers did this completely legally using existing tax breaks. Congress responded by creating the AMT as a second tax system.  Many deductions and exemptions are disallowed for AMT, the tax rate is reduced, and if the resulting liability is greater than the regularly computed tax, the higher one is paid.

 

In the ensuing years, the scope of the AMT grew from those first few high-income taxpayers to encompass millions of Americans.  Since one of the deductions disallowed for AMT is state and local taxes, AMT became the de facto income tax for millions of middle-class citizens in high-tax states such as New York and New Jersey.

 

The AMT provides an exemption so lower-income taxpayers don't have to pay it. In 2017, before the Tax Cuts and Jobs Act (TCJA), the exemption was $54,300 for single taxpayers ($84,500 for married taxpayers filing jointly).  This exemption began to phase out once AMT income reached certain thresholds - in 2017, $127,700 for single taxpayers ($169,900 for joint filers).  Once income exceeded about $640,000 single ($750,000 joint), the AMT exemption was reduced to zero.

 

TCJA did not repeal the AMT, as many observers expected.  Instead, it significantly raised AMT exemptions and phaseout levels from 2018 through 2025. As a result, the AMT will no longer be the inescapable burden it had become for much of the middle class. AMT is expected to affect only about 200,000 taxpayers in 2018, compared to five million in 2017.

 

In 2018, the AMT exemption is increased to $70,300 for single taxpayers and $109,400 for joint filers.  Moreover, the phaseout thresholds do not begin to erode those exemption amounts until AMT income reaches $500,000 on a single taxpayer's return and $1,000,000 for married individuals filing jointly.  All these amounts will be indexed for inflation after 2018.

 

If you have any questions regarding how the changes to AMT impact your tax liability, please contact your LMC professional.

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