Thursday, July 12, 2018
While the GOP Tax Act did not do away with the dreaded Alternative Minimum Tax (AMT) for individuals, it is as good as gone.
First, some background.
The AMT (a more appropriate name would be the Mandatory Maximum Tax) was originally enacted in 1969 in response to testimony by the Secretary of the Treasury that 155 individuals with Adjusted Gross Income of more than $200,000 (over $1 Million in today’s dollars) paid “0” tax on their 1967 tax returns. Congress received more letters that year on the Secretary’s testimony than they did on the Vietnam War!
Of course, Congress, being lazy idiots, rather than responding by acting logically and eliminating the loopholes in the Tax Code that allowed the high-income individuals to avoid paying tax, reacted and created a complicated alternative tax system.
The tax was originally just a “Minimum Tax” (back when I started in “the business” there was also a 50% “Maximum Tax” on earned income). It was calculated on Form 4625 and reported in the “Other Taxes” section of the 1040. Beginning with the 1979 Form 1040 the an “Alternative” Minimum Tax reported on Form 6251 was added to the Minimum Tax. The Minimum Tax was repealed in 1982, leaving just the “Alternative” version effective with 1983 tax returns.
The passive activity and other rules included in the Tax Reform Act of 1986 effectively closed many of the loopholes used by the wealthy to avoid taxes that had led to the creation of the Maximum Tax in the first place. But instead of doing away with it, as should have been done, the Act revised it into a kind of “stealth tax” to deceive the American public. We were told that TRA 86 would reduce and, to a degree simplify, taxes for all – which it did under the “regular” income tax. But what Washington gave with one hand via the regular tax they took back from the middle and upper middle class with the other hand via the revised AMT.
My clients, and those of my mentor, first became victim of the AMT in the early 1990s. In the new millennium I have had to at least check the AMT exposure of about 2/3 of my clients each year. To be sure the pre-TCJA AMT did not affect the truly wealthy – the so-called 1%. It took its toll on the middle and upper middle class, especially penalizing families in highly taxed states (like NJ).
The “preferences” of the AMT, added back to “regular” taxable income to determine Alternative Minimum Taxable Income (AMTI), that usually made taxpayers victims of the dreaded tax were –
* Personal Exemptions
* Medical Expenses (the AMT exclusion was 10% of AGI instead of 7.5%)
* Home Equity Interest
* Miscellaneous Expenses subject to the 2% of AGI exclusion (employee business expenses, investment expenses, tax preparation costs, legal fees)
None of these items were deductible in calculating the AMT.
Under the GOP Tax Act, for 2018 through 2025 I expect none of my clients will be victims of the AMT. Why?
* The Personal Exemption deduction is repealed.
* The medical expense AGI exclusion (beginning in 2019) is 10%.
* Home equity interest and miscellaneous expenses (subject to the 2% exclusion) are no longer deductible.
* The itemized deduction for taxes is limited to $10,000.
It is interesting how the “new” 1040 follows closely the “old” AMT rules for deductions (originally taxes were not going to be deductible at all – but the $10,000 was added to appease Republican Congresscritters from highly taxed states). I had heard that one option being considered for “tax reform” was replacing the “regular” tax system with the AMT system for all taxpayers.
Pre GOP Tax Act, the AMT “exemption” was reduced, and eventually phased out altogether, as AGI, and therefore AMTI, increased beginning at a relatively low threshold. So, for example, while qualified dividends and long-term capital gains were taxed at special lower rates for both regular tax and the AMT, this income increased AGI, and AMTI, and could reduce the AMT exemption. But now the phase out begins at $500,000 for unmarried taxpayers and $1,000,000 for married ones. So this will not be an issue for my clients.
The changes to the AMT make up for losing substantial deductions for exemptions and property and state income taxes, which were not deductible anyway in the old AMT, for many of my highly taxed NJ clients.
So, while the Act did not do away with the AMT altogether, thankfully it actually did away with it for most taxpayers.