Nothing gets taxpayers fired up quite like the alternative minimum tax, commonly called the AMT.
This separate tax was created to make sure certain high-income taxpayers accounted for their fair share. In recent years, however, it applied to many middle-income and upper-middle-income filers, experts say. This year, the good news that is fewer taxpayers will have to grapple with the AMT when filing 2018 income taxes. Tax reform slashes the number of filers paying this tax from 5 million in 2017 to 200,000 in 2018, according to the Tax Policy Center. That’s due to a double whammy against AMT liability: new limitations on certain deductions and higher income limits for those subject to the tax.
“We’re going to have very, very few clients paying AMT this year,” says Lawrence Pon, a tax specialist who owns an accounting firm in San Francisco. In his practice, Pon says, the clients paying this tax primarily will be those exercising incentive stock options, a kind of company stock offered to key employees.
If you’re wondering whether you owe the AMT this year, there are some important tax-planning strategies and concepts to know. Read on for the answers to these questions:
— What is the alternative minimum tax?
— Who pays the alternative minimum tax?
— What are the tax rates for the alternative minimum tax?
— How can I avoid the alternative minimum tax?
What’s the Alternative Minimum Tax?
The alternative minimum tax, or AMT, is a separate income tax designed to ensure that high-income taxpayers don’t dodge appropriate levels of tax payment by claiming too much in deductions. “As the name sounds, its essentially an alternative way to calculate your tax liability,” says Logan Allec, a certified public accountant and creator of the finance website Money Done Right.
In practice, the AMT requires certain filers to add back various deductions or count specified sources of income that are not required when calculating regular taxable income. Items that must be added back include state and local income tax and personal property tax deductions. Filers may also need to tally up incentive stock options, certain tax-exempt interest and other financial sources to calculate what’s owed under the AMT.
“It’s a second tax system, it’s a flat tax and it’s done in parallel to regular tax,” Pon says.
See: [15 Tax Questions — Answered.]
While the calculation is complex and will vary depending on an individual’s tax situation, the idea is that certain taxpayers who owe more under the AMT than under the regular income tax calculation must pay the higher of the two. The tax form associated with the AMT is form 6251, and a good tax preparer or robust tax software program can also help you calculate this tax.
Who Pays the Alternative Minimum Tax?
While your exposure to the AMT will be determined largely by your unique financial situation, not everyone needs to fret about it. If your regular taxable income, combined with certain AMT-specific adjustments, doesn’t exceed a particular limit, or “exemption” amount, you won’t pay AMT. This number functions a bit like the standard deduction, but for the AMT.
You may need to pay the AMT if your 2018 adjusted gross income, plus the AMT adjustments, exceeds these amounts:
|Head of household||$70,300|
|Married filing separately||$54,700|
|Married filing jointly||$109,400|
Because these exemption amounts are considerably higher than they were in the previous tax year, experts believe fewer filers will be impacted by the AMT this year.
[Read: How to File Taxes for Free]
While income below those cutoffs is exempt, the exemption starts to “phase out” at 25 cents per dollar earned once filers reach certain threshold amounts in adjusted gross income. Those AMT phaseouts for 2018 income are:
|Filing status||Exemption phaseout|
|Head of household||$500,000|
|Married filing separately||$500,000|
|Married filing jointly||$1 million|
Again, these amounts are higher than they were in recent previous tax years, impacting high income tax filers’ exposure to this alternative tax.
What Are the Tax Rates for AMT?
There are only two tax brackets for calculating your tax bill under the alternative minimum tax. For married filing jointly, single and head of household filers, the first $191,500 is taxed at a 26 percent rate ($95,750 if married filing separately). Above that, income incurs a 28 percent tax rate.
|Filing status||26 percent AMT tax rate||28 percent AMT tax rate|
|Single||AMT income up to $191,500||AMT income more than $191,500|
|Head of household||AMT income up to $191,500||AMT income more than $191,500|
|Married filing separately||AMT income up to $95,750||AMT income more than $95,750|
|Married filing jointly||AMT income up to $191,500||AMT income more than $191,500|
How Can I Avoid the Alternative Minimum Tax?
While fewer filers will be impacted by the AMT this year, taxpayers should still plan ahead to ensure they’re making the best tax-planning decisions to decrease their tax bill. Taxpayers may aim to move deductions into a year in which AMT does not apply in order to take full advantage of those write-offs. Other taxpayers may time certain financial moves that impact AMT exposure, such as when they exercise incentive stock options, to reduce their liability. Filers who typically fall into a higher tax bracket, which can be as high as a 37 percent marginal rate on ordinary income earned in 2018, may even recognize additional income in a year in which they pay the AMT to capture the lower 28 percent rate.
If you have a complex tax situation and are concerned about incurring this parallel tax, speak with your tax professional.
Remember that filers who paid the alternative minimum tax in previous years can carry forward an AMT credit to reduce their tax bill in a year in which they pay ordinary income tax. The calculation is complex, but it’s worth taking copies of your previous years’ tax returns to your tax professional to verify whether you qualify to cash in on this credit. “The takeaway there is: If you’re switching tax preparers this year, you need to give them the last few years’ tax returns, so we can get the carryover in,” Pon says.
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What’s the Alternative Minimum Tax and Who Pays It? originally appeared on usnews.com