Question

The Alternative Minimum Tax (AMT) was designed so that high-income taxpayers could avoid using tax loopholes to pay little to no income tax. AMT has not been adjusted for inflation so an increased number of middle-class taxpayersare having to pay AMT. What are your thoughts on AMT - should AMT be eliminated, is it necessary, should reform occur??? Please discuss your thoughts.

Answer 1

The Alternative Minimum Tax (AMT) is an alternate method of calculating tax liability. In theory, it's supposed to prevent wealthier taxpayers from slashing their taxable incomes to a bare minimum by using all the deductions that are available under the Internal Revenue Code (IRC). In reality, the AMT can hit some middle-income taxpayers, too.

• The tax takes away some common deductions to arrive at a taxpayer's alternative minimum tax income (AMTI). That's the "alternative" part.
• The "minimum" aspect is something of a misnomer—a taxpayer must calculate his taxable income both ways, once according to ordinary IRC rules, then again using the AMTI methodology.
• He must pay the AMT if the AMTI calculation results is more than that year's exemption amount.

Alternative Minimum Tax (AMT) was designed so that high-income taxpayers could avoid using tax loopholes to pay little to no income tax. AMT has not been adjusted for inflation so an increased number of middle-class taxpayers are having to pay AMT.The individual alternative minimum tax (AMT) operates alongside the regular income tax. It requires many taxpayers to calculate their liability twice—once under the rules for the regular income tax and once under the AMT rules—and then pay the higher amount. Originally intended to prevent perceived abuses by a handful of the very rich, it now affects roughly 5 million filers

.Purpose of AMT

• AMT is designed to prevent taxpayers from escaping their fair share of tax liability through tax breaks. However, the structure was not indexed to inflation or tax cuts.
• This can cause bracket creep,a condition in which upper-middle-income taxpayers are subject to this tax instead of just the wealthy taxpayers for which AMT was invented. In 2015, however, Congress passed a law indexing the AMT exemption amount to inflation.
• The AMT is a secondary tax put in place to prevent the wealthy from artificially reducing their tax bill through the use of tax preference items.
• The idea was that people who had very high incomes should not be able to use certain deductions to lower their tax bill below what should be reasonablyexpected for taxpayers at their income level.
• Fortunately, most taxpayers are not subject to the AMT: those at the very bottom don't make enoughto have to pay it, and those at the top already pay a high tax rate. That leaves those in the middle who might potentially be subject to the tax. Fortunately, however, most people who fill out the AMT.

The American Taxpayer Relief Act

• The AMT threshold was finally indexed for inflation when the American Taxpayer Relief Act (ATRA) went into effect in January 2013. It now inches upward a little year by year to keep pace with Americans' earnings.
• If you were never subject to the AMT to begin with, it's unlikely that your annual well-deserved pay raise will push you over the limit from one year to the next. If you become a rock star overnight and your income suddenly quadruples, you'll find yourself dealing with this tax.
• That said, some taxpayers still fall into a gray area. You could find yourself liable for the AMT in any given tax year if your income is such that you've been teetering on a tightrope from year to year between having to pay the AMT or dodging it and your income increases by more than the annual inflation adjustment.

AMT Phaseouts and Exemptions
The AMT exemption functions something like a standard deduction for the alternative minimum tax. In lieu of all the deductions and other adjustments that are taken away when calculating AMTI, taxpayers can reduce their AMT income by claiming the exemption amount for their filing status instead. Basically, if your income exceeds the exemption amount for your filing status, you're subject to the AMT. The AMT is then calculated on what's left over after the exemption has been subtracted.

But there's a catch. The exemption amount begins reducing or "phasing out" by 25%—25 cents of each dollar or $1 out of every $4—between your AMTI and the phase-out threshold amount. The phase-out is completed and the exemption amount is reduced to zero when your AMT income reaches four times the exemption amount plus the phase-out threshold.

MY OPINIONS;-

As I said above, you’re more likely affected by AMT if you have a larger family, high state and property taxes and/or high miscellaneous itemized deductions. And that’s why, especially for my higher income clients that find themselves in AMT land, I didn’t suggest prepaying state taxes because of the AMT consequences. That point has become a bit moot under the new law, as you can’t prepay your state and local income taxes to try to circumvent the new limit, although property taxes are still fair game.

• The final bill also increases the standard deduction to $12,000 for individuals and $24,000 for married couples, eliminates personal exemptions and limits itemized deductions like State and Local Taxes ($10,000 cap) and miscellaneous itemized deductions (completely eliminated).
• Specifically for AMT, the exemptions increase to $70,300 for individuals and $109,400 for married taxpayers filing jointly. The exemption phaseout has also increased to $500,000 for individuals and $1,000,000 for married taxpayers filing jointly.
• The combination of limited itemized deduction and increased exemption and exemption phase-outs means a lot more people will escape AMT from 2018 through 2025, when these provisions are set to expire. These changes will make some people happy and others not so much.