The AMT stands for the Alternative Minimum Tax. It is a modified income tax that occurs when a taxpayer takes advantage of exemptions that make their standard income tax lower. In other words, the AMT uses a separate set of rules to calculate a taxpayer’s actual taxable income after he’s selected his deductions.
Wondering who pays Alternative Minimum Tax and how could it affect your taxes this year? Read on to learn more.
What is the Purpose of AMT?
The AMT started out as a way to keep wealthy taxpayers from overusing deductions to avoid paying their income taxes. While it still serves that purpose, the scope has broadened to ensure that everyone pays at least the minimum amount of tax on their income each year.
Unfortunately, the original AMT structure was not designed to accommodate for inflation or tax cuts. This issue can cause what’s known as “bracket creep,” which can be a problem for upper-middle-class taxpayers. This issue was addressed in 2015 when Congress passed a law indexing AMT exemption amount to inflation.
After the Tax Cuts and Jobs Act (TCJA) passed in 2017, fewer upper-middle-class taxpayers became subject to the AMT. Now, the AMT applies mostly to high-income taxpayers who participate in tax sheltering activities.
(In fact, there was talk of repealing the individual alternative minimum tax as part of the TCJA. Obviously, a full repeal wasn’t included, but the TCJA nevertheless reduced the number of taxpayers subject to the AMT.)
How Does AMT Work?
As of 2018, the top AMT rate was 28%, compared to the top regular ordinary-income tax rate of 37%. But the AMT rate typically applies to a higher taxable income base. If you are subject to it, you will have a larger tax bill.
The AMT differs from normal tax rates in that it doesn’t include the standard deduction or personal exemptions. In addition, the AMT typically doesn’t include many popular itemized deductions, including local and state income taxes, foreign tax credits, and employee expenses for businesses.
As a result of these differences, the AMT is typically higher than your normal income tax. AMT rates also may vary from year to year. For example:
- In 2018, the AMT exemption threshold was $70,300 for singles and heads of households; the exemption threshold was $109,400 for married couples filing jointly. (These are up from $54,300 and $84,500 in 2017, respectively).
- In 2019, AMT exemption for single filers is $71,700 (up from $70,300 for 2018). For married joint filers, AMT exemption is $111,700. (These are up from $70,300 and $109,400 in 2018, respectively.)
Who Pays AMT?
If your income as a single or joint filer exceeds the exemption rate, you will have to pay AMT. This occurs when AMT liability is greater than normal tax liability. In order to determine your risk, it’s important to understand AMT triggers.
What Triggers AMT?
AMT preference items are the primary trigger for AMT inclusion; however, a few income items may also trigger AMT. These items include:
- Long-term capital gains and dividend income, even though they’re taxed at the same rate for both regular tax and AMT purposes
- Accelerated depreciation adjustments and related gain or loss differences when assets are sold
- Tax-exempt interest on certain private-activity municipal bonds
- The exercise of incentive stock options
How Do I Plan for the AMT?
If it looks like you may be subject to the AMT this coming tax year, it’s important to prepare accordingly. Learning how to avoid the AMT could save you a significant amount of money, depending on your liability.
Contact Pasquesi Sheppard Today
Suspect you might be subject to AMT this year? If you have any questions such as how to avoid the AMT, contact Pasquesi Sheppard today.