The Alternative Minimum Tax (AMT) is a second tax system that operates alongside the standard income tax system. The AMT determines how much a tax filer (individuals, estates, trusts, and corporations) will end up paying based on whether their federal tax liability falls below the minimum amounts established by the AMT formula for their filing status.
The tax filer will calculate their tax liability as they would normally, then calculate their liability again by applying the AMT rules. The AMT rate is then imposed on that certain amount of the tax filer’s adjusted taxable income over the specified threshold.
The AMT was designed to prevent people from avoiding their tax liability under the regular tax rules. Taxpayers today can expect to pay the minimum amount set out under the AMT guidelines regardless of their exemptions and deductions.
Who Must Pay the Alternative Minimum Tax?
You may end up paying the AMT if your adjusted income is higher than the amount allowed for your filing status. There are also very few deductions, exclusions, and credits available to help reduce your AMT amount.
If you are taking full advantage to contribute the maximum amount allowed to your retirement accounts, this may lessen your AMT liability.
As of January 2019, here will be a 26% rate attached to the first $191,000 of the AMT amount, and then 28% for higher AMT taxable incomes.
Taxation is a highly complex area. You should consult with a tax professional to find out how you can reduce your tax liability.
What are the Arguments in Favor of the AMT?
Those in favor of the AMT argue it creates a fairer income tax system. Before the AMT, higher earning tax payers, who previously claimed enough deductions and credit, would end up paying little or no income tax. Now these same tax filers will likely end up paying under the AMT rules.
What are the Arguments Against the AMT?
Those opposed to the AMT argue that rather than creating a fairer tax system, the AMT has created inequalities. Because of the AMT, tax filers are no longer allowed to claim deductions on the state and local level when calculating their AMT.
Therefore, if you file taxes in a state with a high income tax rate, you are more likely to be subject to the AMT than if you lived in a state with a lower income tax rate. Tax filers also aren’t allowed to claim deductions for AMT based on personal property taxes or for net operating losses.
As well, tax filers cannot claim personal exemptions when determining their AMT liability. For families with three or more children, that means they may be more likely to have an AMT liability.
Ultimately, critics conclude that the AMT needs to be repealed because it has impacted millions of unintended tax filers since the current AMT exemptions don’t account for inflation. As such, as wages increase for taxpayers, the AMT has been applied to unintended filers, specifically middle class taxpayers and retirees.
What is the Current Status of the Alternative Minimum Tax?
In December 2017, the Tax Cuts and Jobs Cut Act (TCJCA) was passed. This legislation affects the federal tax filing system for individuals, businesses and other entities. The TCJCA increases the AMT exemption, increases the exemption phase out income levels, and eliminates the trigger on AMT for middle class taxpayers. The Internal Revenue Service at current date on its website indicated it was still working on implementing the requirements under the TCJCA.
The TCJCA was enacted to simplify the individual income tax. Specifically, it has reformed the individual income tax by making changes to the itemized deductions and the alternative minimum tax.
For the AMT, it reduces the amount of time it will take to complete the form for documenting your alternative minimum tax information. Importantly, the IRS estimates that the AMT filings will decrease from 10 million to 1 million because fewer tax filers will have AMT liability.
As well, the TCJCA increased the personal AMT exemption and exemption phase-out levels, which will likely result in fewer households incurring AMT liability and reduce the AMT amount for those who do have AMT liability.
It also eliminates the AMT for corporations and permanently indexes the exemptions for inflation going forward, which addresses concerns that it will again apply to unintended tax filers like the middle class.
Should I Consult an Attorney for Issues with the Alternative Minimum Tax?
Determining how much tax you are required to pay is very complicated. The Tax Cuts and Jobs Cut Act is still relatively new, which can make it even more difficult to understand how to determine your tax liability.
There are tax professionals that can assist you with determining your ultimate tax liability so that you don’t run afoul of the Internal Revenue Service. Consult with a professional tax preparer or a tax attorney to fully understand your tax liabilities.