The Tax Cuts and Jobs Act created several changes within the tax law, one of those changes is with the Alternative Minimum Tax (AMT). The new changes will make the AMT affect less people and those it does affect, it won’t affect as hard.
The AMT was created in 1969 to target wealthy taxpayers who were taking advantage of tax credits and breaks to lower or eliminate any income tax they had to pay. On paper, the AMT would only affect wealthy taxpayers, but over the years as tax laws changed, the AMT did not, and it ended up affecting more middle-class taxpayers and retirees who ended up paying more taxes in the end due to the AMT. The AMT was also not automatically updated for inflation, leading to more middle-class tax payers paying the substantial tax.
The Alternative Minimum Tax comes after you figure out your regular income tax. It is a parallel tax system that operates behind your regular tax by expanding the amount of income that is taxed. You can figure out whether you owe any additional tax under the AMT system by filling out Form 6251. If the tax calculated on Form 6251 is higher than calculated on your regular tax return, you must pay the difference as AMT in addition to the regularly calculated income tax. Tax rates under the AMT system are: 26% rate is paid on the first $191,000 and a 28% rate on higher AMT taxable incomes.
Before the Tax Cuts and Jobs Act, about 5 million taxpayers were expected to pay the AMT under the old law. Now only 200,000 are expected to pay the AMT. Because so few will be paying the AMT, the IRS will remove its online AMT Assistant tax tool. There were three key changes to the AMT in the Tax Cuts and Jobs Act that returned the tax system to primarily targeting millionaires.
One of the changes that was made was the AMT exemption. It was increased substantially for all taxpayers. Those filing Married Filing Jointly (MFJ), their exemption is $109,400 for 2018, while single filers and heads of households have an exemption of $70,300. Last year the exemptions were $84,000 for MFJs and $54,300 for single filers. Along with the increase in the exemptions, the income levels that the exemptions phase out was raised. They are now $1 million for MFJ couples and $500,000 for other taxpayers. This is compared to the income levels of $160,900 for MFJ and $120,700 for all other filers in 2017. Lastly, many of the tax breaks that made middle-class taxpayers pay the AMT have been changed. Middle-class taxpayers usually had to pay the AMT because they had a large amount of personal and dependent deductions. Along with the AMT changes, the Tax Cuts and Jobs Act also eliminated most personal exemptions, miscellaneous itemized expenses and the home equity interest deduction. Because of these changes, it will mean to trigger the AMT, you will have to have a lot of tax preferences.
It is hard to say who is at risk for AMT and who will have to pay it because AMT and its triggers are so complicated and because of all the recent tax changes. It is best to talk to your accountant or your tax preparer to see what your situation looks like and if you are at risk. If you’re in need of a tax preparer, Polston Tax can help! We have a team of tax preparers and accountants who can help you with any type of tax situation. Call us today at 844-841-9857 or click below to schedule a free consultation. You can also read more about the changes made by the Tax Cuts and Jobs Act here.