Question

What is the purpose of the alternative minimum tax and who pays it? How was the individual alternative minimum tax impacted by the December 2017 tax reform law?

Review available tax credits discussed in chapter 12 of the text. Compare the tax credits that you actually take with the tax credits you would like to take.

Explain why you made the particular selections.

For the tax credit(s) that you would like to take, explain why you are not able to take the tax credits(s).

For the tax credits that you actually take, explain the benefits that you receive from the tax credit(s).

If you have never prepared a tax return or looked at this information before, what do you find most significant about the information that you read about tax credits?

How, if at all, were the tax credits that you take or would like to take impacted by the December 2017 tax reform law?

Answer 1

The substitute minimal Tax is a obligatory alternative to the typical income tax. It will get triggered when taxpayers make greater than the exemption and use many customary itemized deductions. The intent the AMT catches these in better tax brackets is because it eliminates lots of those deductions.
That's the disturbing part in regards to the AMT. If you're making more than the AMT exemption amount and use the deductions, you've got to calculate your taxes twice.
That is as soon as for the normal sales tax, and as soon as for the AMT. To add insult to injury, you might have then got to pay the higher tax invoice.
On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act. It keeps the AMT, however raises the exemption and phaseout phases from 2018 by means of 2025. Thus, it'll have an effect on 200,000 tax filers rather of the 5 million affected in 2017. The invoice entails an automated price of dwelling adjustment. Congress eliminated the AMT for establishments.
How the AMT Works
The AMT is specific from the common tax rate when you consider that it doesn't have the normal deduction or any private exemptions. It additionally doesn't enable general itemized deductions. These incorporate state and regional earnings taxes, foreign tax credit, and employee industry costs. It doesn't enable the curiosity on residence fairness mortgages, until it was used to beef up your residence. Real estate and individual property taxes are not deductible.
Neither are medical expenses.
You additionally have to file for those who declare the qualified electrical car credit (kind 8834), the personal use part of the substitute gas vehicle refueling property credit (type 8911), or the credit score for prior yr minimum tax (form 8801).
The AMT might additionally incorporate other income streams not counted by the standard income tax.
Therefore, the AMT tax is better than the typical tax.These comprise:
The reasonable market worth of incentive inventory choices that have been exercised however not bought.
Or else tax-exempt interest from exclusive exercise bonds.
International tax credit.
Passive earnings and losses.
Internet working loss deductions.
Fortunately, the AMT tax price is simpler than the common tax premiums. There are only two tax charges: 26 percent and 28 percent. The tax fee is 26 percent on income under the AMT threshold, and 28 percentage above it. For the 2017 tax 12 months, the edge was $187,800 of AMT taxable income, or $ninety three,800 for many who are married submitting separately. In 2018, the threshold is $191,500 for taxpayers filing as single and married joint. It's $ninety five,750 for married submitting separate.
The AMT exemption is far larger than the standard exemption. But it begins to vanish after you attain a targeted sales degree, referred to as the phaseout. As soon as your earnings hits the phaseout level, $0.25 of the exemption disappears for every dollar above the phaseout. The exemption reverts to pre-Act stages in 2026.
Who Has the Pay the AMT
You most effective must fear concerning the AMT in case your adjusted gross income exceeds the exemption. If you make that revenue or above, that is the AMT taxable sales. You may also must calculate the AMTI and pay the higher tax. You can do so on type 6251. Your tax application package will also do it for you. Which you could additionally go to the IRS AMT Assistant.
While you qualify for the AMT in a tax year, you ought to pay it. But that you could adjust your spending to lower the AMT for the next yr. There are 4 long-established methods.
If you're an worker, get your company to reimburse you.
Be certain your state tax withholding isn't larger than your anticipated cost. State tax payments are not deductible underneath the AMT.
Pay your house taxes simplest when they are due. Don't prepay your next installment by way of the tip of the year. .
Sell exercised incentive stock options in the identical yr you recreation them. If you undertaking the choices, however do not sell, the worth of the exercised choices becomes sales for AMT purposes.
The AMT does now not impact everybody above the qualifying earnings thresholds. Earlier than the brand new tax invoice, it had the most have an impact on on households incomes between $500,000 and $1 million yearly. However even in that bracket, only sixty two.9 percent paid the AMT. Here is the breakout for 2017, in line with the Tax coverage middle.
Sales percentage Who Pay AMT
$zero - $75,000 zero%
$75,000 - $one hundred,000 0.2%
$a hundred,000-$200,000 1.9%
$200,000-$500,000 29.Four%
$500,000 - $1M 62.9%
$1M+ 19.9%
The AMT is extra prone to snare married taxpayers with youngsters, for a few factors. First, they more often than not have bigger incomes, chiefly if each mom and dad are working. 2d, the AMT does now not have further exemptions for each and every loved ones member. Third, there is not any "marriage bonus" under the AMT.
How it influences the U.S. Economic climate
Why failed to Congress eliminate the unpopular substitute minimal Tax, as Trump promised? Our elected officers can not turn down the additional income. The AMT produces around $60 billion a year in federal taxes from the top 1 percentage of taxpayers. Consequently, it is a innovative tax.