What Happens to the AMT in 2018

By Alan Olsen
What Happens to the AMT in 2018

As the dust is now settled on the Tax Cuts and Jobs Act, one glaring tax has remained standing, with relatively few changes. The alternative minimum tax or AMT.

The first “minimum” tax started with the passing of the Tax Reform Act of 1969. With it was announced that 155 high-income households had not paid a dime of federal taxes due to utilizing a high number of tax benefits and deductions that reduced their liabilities down to zero. At the time it served as an add-on tax and continued to be one (with some minor changes) until the Reagan era.

It was at this time that the AMT as we currently know it was created with the passing of the Tax Equity and Fiscal Responsibility Act of 1982 which created a parallel tax system.

In this parallel tax system, the individual computes their taxes once under the normal system and then computes it a different way under the Alternative Minimum Tax. While the AMT has a lower tax rate, a lot of the things that are deducted under the normal tax system are not deductible under the AMT. With a higher base and a lower rate, the effective impact of that for a lot people is that it adds an additional 2-3 percent of tax onto their taxable income.

Since the AMT's modern inception 20-30 years ago, Congress keeps saying that they should do away with it. However, due to the political implications of getting rid of a revenue source of 1.4 trillion dollars over 10 years, they won't. This leaves them without a way to completely dispose of the AMT and so they tweaked it. There were some improvements made so that only 5-6% of the population end up subject to the it.

Politically it doesn’t get a lot of people in the lower end clamoring to eliminate it since they aren’t subject to it, but for high net worth individuals, and for people who use CPAs in that income bracket, they are all aware of the AMT and that it basically adds on an additional 2-3% to their income.

If you have incentive stock options, the effects of the AMT could be worse for your overall tax bill, since Congress began to address that in the law.

For any questions and or doubts you might have about the AMT and how it might affect you and your family, please contact us at GROCO and allow us to help.