What's the Alternative Minimum Tax and How is it Changing?
The Tax Cuts and Jobs Act made many changes to the individual tax law and this includes the AMT (the alternative minimum tax).
What is the Alternative Minimum Tax?
The AMT is a different way to calculate federal income tax in the United States. It was implemented to ensure that high-income households paid their fair share of taxes, regardless of how many deductions they were entitled to.
The AMT is calculated by starting with your adjusted gross income and adding back in a bunch of deductions like the deductions for state and local income taxes, personal property taxes, and deductions for a net operating loss. The mortgage interest deduction and charitable contributions are still allowed, as are "above the line" deductions like IRA contributions.
While there are seven tax brackets in the standard income tax calculation method, the AMT has only two: 26% and 28%. You calculate your federal income tax using the standard method and the AMT method and pay the higher of the two amounts.
How and why is it changing?
The problem with the implementation of the AMT is that the exemptions weren't initially indexed for inflation. Over time, as wages increased, the AMT started to apply to more and more taxpayers, including middle-income households who the tax was never supposed to affect.
In order to ensure that the AMT primarily affects it's intended targets (high-income households) from 2018 on, the Tax Cuts and Jobs Act significantly increases the AMT exemption amounts and raises the phaseout thresholds for these exemptions. It also permanently indexes the exemptions for inflation going forward.
What does this mean for you?
The alternative minimum tax will apply to fewer people in 2018 and moving forward. Few, if any, middle-class households should be affected by the AMT whereas before they may have been.
These changes go into affect in 2018 so you may still be liable for the alternative minimum tax depending on your income for the 2017 filing season. Make sure to contact a tax professional if your'e unsure if this applies to you.