Overview
The AMT is a separate and parallel tax system originally introduced to target
taxpayers who might otherwise pay little or no regular tax because of the use
of certain deductions. The new tax law introduced modifications to the AMT for
tax years 2018–2025 that will likely result in many fewer taxpayers being liable
for AMT.
The new tax law significantly increases the exemption amounts and the
phase-out thresholds for AMT from their 2017 amounts. For 2018:
-
for married taxpayers filing jointly, the exemption amount is increased
from $84,500 to $109,400 and the phase-out threshold is increased from
$160,900 to $1,000,000
-
for married taxpayers filing separately, the exemption amount is increased
from $42,250 to $54,700 and the phase-out threshold is increased from
$80,450 to $500,000
-
for all other individuals the exemption amount is increased from $54,300
to $70,300 and the phase-out threshold is increased from $120,700 to
$500,000.
Certain situations, including the exercise of incentive stock options (ISOs), can
trigger AMT liability for taxpayers who would not ordinarily be subject to it.
However, the changes introduced by the new tax law make it more likely that
even if you were subject to AMT in prior years, this is less likely to be the case
in tax years 2018–2025.
In calculating AMT, certain itemized deductions are disallowed. You are allowed
only these itemized deductions:
- Medical expenses to the extent they exceed 7.5% of your AGI
- Deductible casualty losses
- Charitable contribution deductions
-
Deductions for interest expense on debt specifically incurred to acquire,
construct, or substantially rehabilitate your residence
-
Investment interest expense up to the net income you derive
from investments.
Your alternative minimum taxable income, less any applicable AMT exemption,
is multiplied by the applicable rate and reduced, within certain limitations, by
any allowable foreign tax credit. If the resulting minimum tax exceeds your
regular tax, you are subject to an AMT liability equal to the difference.
Note: that the 3.8% tax on an individual’s net investment income—also known
as the
“net investment income tax,”
discussed in Investment Related Tax Issues —is not taken into
consideration in determining whether, and how much, AMT liability is imposed.
Minimum tax credit
If you have an AMT liability because of certain deductions or credits not fully
allowed for AMT (“non-exclusion preferences”), you can use the minimum tax
credit to decrease your regular tax liability in a later year. In most cases, this
credit reduces the impact of the AMT by effectively refunding some or all of the
AMT paid. Thus, in some cases, AMT planning may be a matter of
timing—payment of AMT now and reduction of regular tax in the future.
Planning Tips:
As a result of the significant
increases in the AMT exemption
amounts and the raising of the
phase-out thresholds outlined
above, fewer individuals may find
themselves paying AMT during the
2018–2025 tax years, as compared
to prior years.
If you are paying AMT as a result
of exclusion preferences such
as itemized deductions that are
disallowed for AMT purposes (which
do not generate a minimum tax
credit), you should consider whether
it is advantageous to accelerate
income or defer deductions.
This will depend on your expected
future regular tax rate and whether
or not you will continue to be
subject to AMT.
When you exercise an incentive
stock option (ISO), you create
an AMT adjustment that in turn
increases your potential exposure
to the AMT. You may want to avoid
exercising ISOs if you are, or are
close to being, subject to the AMT.
Alternatively, you may choose to
exercise only the amount of ISOs
that will result in no AMT liability. In
some cases, it may make economic
sense to exercise ISOs and sell the
stock in the same year to negate the
effect of the AMT adjustment.
