The Trump administration and Republicans in Congress drove a stake into the heart of the alternative minimum tax late last year, but this vampire is not completely dead. So do you have to worry about it or not?
The good news is that if you weren’t subject to the AMT before the reforms, you most certainly don’t have to worry about it now, unless you’ve suddenly become much wealthier.
But tax advisors say that households who were at risk of having to pay this extra-high income tax in the past are still wise to see if it will apply to them today — and to take evasive action if it might. At risk are people with mid-six-figure incomes, lots of kids, itemized deductions and long-term capital gains, and holdings like incentive stock options and private-placement bonds, tax experts say.
In 2015, the most recent year for which full-year data is available, 10.3 million individual taxpayers filed the AMT return, including more than 60 percent of households earning between $200,000 and $500,000, according to The Tax Foundation. That year, 4.9 percent of all taxpayers faced the AMT, paying a total of $33.2 billion, according to The Tax Policy Center.
“Which taxpayers are likely to be affected the most? Taxpayers with large families, employees who claimed a large amount of employee business expenses, very successful small business owners,” says Mark Steber, chief tax officer at Jackson Hewitt, the tax-preparation firm, noting that far fewer taxpayers will face AMT now.
The first AMT was created in 1969 to make sure wealthier people could not use loopholes to escape income tax entirely, but it has been modified numerous times. Under the AMT, people with higher incomes were not allowed to reduce taxable income with items like the personal exemption, deductions for state and local taxes and certain miscellaneous itemized deductions. Even deductions for mortgage interest and medical expenses were lower than on the standard return, and the AMT was especially hard on successful small-business owners who took deductions, like accelerated depreciation on property and equipment.
Taxpayers in potential AMT territory fill out an AMT return in addition to the ordinary return, then pay the larger of the two tax bills.
But the Bush tax cuts of 2001 had the perverse effect of making more taxpayers subject to AMT by reducing taxes on the regular return. And the AMT was not indexed to inflation, so over time it applied to more and more taxpayers as incomes grew, dipping deep into the middle class that was not the original target. Originally aimed at fewer than 200 high-income households, the AMT return was completed by more than 10 million households in 2015, the latest year for which final figures are available, including nearly 60 percent of households earning between $200,000 and $500,000, according to a Tax Foundation analysis of IRS data. About 4.4 million households had to pay extra tax as a result.