One of President Donald Trump’s campaign promises was to kill the alternative minimum tax, or AMT, as part of his plans to overhaul the tax code. Originally intended to ensure that the wealthy pay some tax, this tax has become a thorn in the side of upper middle class tax payers over its 47-year existence. Now, in a new outline, Trump has overhauled the tax code — and proposed to eliminate the AMT.
As certified public accountant Scott M. Aber said on CNBC, “It was originally targeted at the super-wealthy when it came out, but the super-wealthy in most cases don't pay it.” Aber went on to explain that the super-rich now typically owe more through the regular income tax calculation than they would via the AMT. Instead the AMT has become a sur-tax on the upper middle class.
How the AMT works
Taxpayers with a lot of itemized deductions are the most likely to trigger the AMT. The AMT calculation is essentially like doing your return a second time. Popular tax programs like Turbo Tax will tell you that your information has triggered the AMT and then calculate what the tax would be under that method. You wind up owing the higher of the two. 4.1 million taxpayers paid a total of $28 billion in AMT taxes in 2015, according to the Tax Policy Center at the Urban Institute and the Brookings Institute.
AMT exemption amounts
For the 2016 tax-year, the exemption amounts from the AMT, which can be thought of like a standard deduction in terms of the AMT calculation, were:
- Single taxpayers: $53,900
- Married filing jointly: $83,800
- Married filing separately: $41,900
- Head of household: $53,900
Who would a repeal help?
As previously mentioned, the AMT has impacted the middle and upper middle class more than the super-wealthy in recent years. The repeal or reform of this part of the tax code would help a portion of Trump’s base.
Any repeal or revision of the AMT would likely not be done in isolation, but rather as part of a more comprehensive tax reform package. Those who are likely to be most impacted by the AMT will need to look at the overall makeup of any reform measures to determine if the changes to the AMT really benefit them once everything else is factored in. (See also: White House Officially Announces Tax Reform Plan)
One possible change that would impact those most susceptible to the AMT is a cap on itemized deductions. One version has deductions capped at $200,000 for married joint filers and $100,000 for single filers. What will be key is what is included and excluded in these caps and the other particulars.
Tax planning will be critical
The press, financial pundits and financial advisors have been speculating for weeks about the impact of the possible changes to the tax code based on President Trump’s likely proposals. The truth is that nobody knows for sure what will be passed by Congress and what the final version will look like. Making plans based on speculation is great if you are right, but could be costly if you are not. A better alternative would be to review your tax situation considering any changes that are made. Whether you do your own taxes or work with a tax professional, planning and reviewing your options in advance of the year-end 2017 is a good idea. This of course assumes that any changes are not passed at year-end allowing little time to make adjustments.
The Bottom Line
President Trump has indicated that tax reform is a priority for the new administration. This include not only the AMT, but also the estate tax, rationalizing the tax brackets for individuals and businesses, capping some deductions and other areas as well. One implication of killing the AMT would be lost tax revenue for the U.S. Treasury. The Tax Policy Institute estimates that the AMT would generate about $350 billion between 2015 and 2017. The government would need to make up for this lost tax revenue in some fashion. (For more, see: Common Items Subject to the Alternative Minimum Tax.)