Individuals who take large itemized deductions or special tax benefits may get hit by the alternative minimum tax (AMT). Even some people who don’t itemize may get hit with the AMT. The AMT is based on the calculation of your alternative minimum taxable income (AMTI), which doesn’t allow certain deductions and exemptions. The AMT is still in effect for 2017 (as of May 2017) but the new administration has stated that they’d like to get rid of the AMT. However, as we’ve seen with Obamacare, government programs and regulations can be hard to get rid of. The AMT is something that should be easier to get rid of (who would support this thing) but as for now, still applies to millions of taxpayers.
Here’s the calculation you’ll need to figure out the AMT for individuals (not corporations).
Regular taxable income
+/- Adjustments and preferences
= AMTI before exemption
x Tax rate (26%/28%)
= Tentative minimum tax
– Regular tax
Let’s talk first about adjustments to AMT. These are items that have been selected by your exception government that aren’t allowed to be deducted for AMTI.
1) Standard deduction can’t be claimed
2) Interest on home equity loans is not deducted
3) Medical expenses under 10% of AGI can’t reduce AMTI
4) Personal and dependent exemptions are not allowed
5) Local and state income taxes and all property and sales taxes are not deductible.
6) Employee business expenses, tax prep, and investment expenses are not deductible
There are also some more special situations (preferences) that should be considered:
1) Private activity bond interest is fully taxable
2)Incentive stock options are taxed when exercised
3)Excess depreciation on personal property is not allowed (that is, excess over 150% declining balance)
What is allowed to still be deducted for AMTI purposes? You can still deduct charitable contributions, other miscellaneous itemized deductions (not 2%), medical expenses (if 10%), mortgage interest, and theft or casualty losses.
The next thing you input into the AMT calculation is your exemption amount based on your filing status. I’ve listed the 2017 exemption amounts below:
|Filing Status||Exemption Amount|
|Married Filing Jointly||$84,500|
|Married Filing Separately||$42,250|
|Trusts & Estates||$24,100|
Once you subtract the exemption amount, you’ve figured out your AMTI. Now a few quick calculations to get down to your AMT. Now you multiply the AMTI you’ve calculated by 26% for the first $187,800 (or $93,900 for married filing separately filing status). Then any excess over $187,800 is multiplied by 28%. This gives you your tentative minimum tax, the tax which you owe if you don’t owe more under the regular way you’d calculate your taxes. If you’re tentative minimum tax is greater than your regular taxable income, you owe the difference. Sound complicated? It is. Let’s go over an example.
Example of the AMT in Action
Joe Taxpayer has an income of $300,000 and he’s single. He has itemized deductions and exemptions of $100,000. He’s got a lot of deductions as well as a high income and is therefore snagged by the AMT. He calculates his AMT obligation by doing the following:
1) add back in interest paid on a HELOC of $15,000
2) add back in personal exemption of $3,000
3) add back in local and state income tax of $20,000
4) add back in investment expenses of $5,000
So now instead of having $100,000 of itemized deductions, Joe Taxpayer only has $57,000 ($100,000 – $43,000). Now Joe’s AMTI before exemption is $243,000. His exemption is $54,300. This makes his AMTI $198,700 which is what we have to multiply by the AMT tax rates of 26/28%. The first $187,800 is multiplied by 26% for $48,828. The amount in excess of $187,800 is multiplied by 28% for $3,052. These two numbers are combined for the tentative minimum tax amount of $51,880.
Now let’s compare that to the tax liability for Joe Taxpayer under the regular tax calculation. He owes tax on $200,000 and his effective tax rate would be about 21.75% for a total tax due of $43,480. You can see this is less than what is owed under the AMT calculation method. Joe’s going to have to pony up $51,880 in order to meet his obligation to the federal government. This represents a 19.3% increase in tax liability over the regular tax method.
The effective tax rate for Joe Taxpayer under the regular tax calculation is 21.75%.
The effective tax rate for Joe Taxpayer under the alternative minimum tax calculation is 25.94%.
Will Trump’s Tax Plan Kill the AMT?
The current administration wants wants to tack an ax to the tax code as it’s currently written, which includes killing the AMT. I say great. This tax hits 5 million taxpayers. It started in 1970 and hasn’t been adjusted properly to account for wage growth. The AMT used to be to make sure very rich people paid some tax. Now the very rich people have other tax breaks and the AMT hits people lower down on the income scale. It’s not a necessary tax.
But that doesn’t mean it’s going to go away. Even with support to kill the AMT in the executive branch, who knows what will actually be passed by Congress. Killing the AMT would result in a decrease of $35 billion in 2017. That’s about 2.2% of the revenue generated by the individual income tax. Trump’s tax code proposal already includes cutting the tax rates and getting rid of the estate tax. The U.S. Treasury would take a big hit on revenue if all three of these go into effect. It might be possible that it gets past Congress but I have my doubts.
Can I Get Out of Paying the AMT?
There’s not a lot you can do to avoid paying the AMT. You have to pay it if you owe it. Unless you want to reduce your income. Not many folks are willing to do that, unless they’re already considering retiring early. There are some clever tax planning tactics that you can implement. These will need to be preplanned and you’ll have to talk with a good tax CPA in order to execute these tactics. This may all be a moot point if Congress passes a bill that kills the AMT. The best thing you can do is to plan based on what the current tax code is and then adjust to the new tax code if necessary.