The Tax Cuts and Jobs Act of 2017 slashed the number of taxpayers subject to the alternative minimum tax, but when the law expires, the exemption will return to pre-2018 levels—and ensnare many wealthy taxpayers.

“Welcome back AMT,” said Michele Lazzara, managing director at CBIZ Marks Paneth in Purchase, N.Y. 

The alternative minimum tax was established in 1969 to ensure that wealthy people would pay sufficient income taxes. “If you have a high-income household, exercise stock options or have large capital gains, you stand a good chance of paying AMT,” Lazzara said. However, there have been worries that as salaries have increased over time, more middle-class taxpayers are getting caught up in paying the tax.

Thomas Pontius, senior financial planner at Kayne Anderson Rudnick in Los Angeles, said three things happened under the 2017 tax law that affected the alternative minimum tax: More money was exempted from the tax for various filers, and the thresholds at which the exemptions phased out also rose. Meanwhile, certain types of deductions—such as state and local tax deductions—that the taxpayer had to add back into their calculation in the past were eliminated under the new law.

Altogether, these changes meant much fewer people ended up paying the tax.

“The Tax Policy Center estimates that the number of AMT taxpayers fell from more than 5 million in 2017 to just 200,000 in 2018,” said Erik Preus, head of investment solutions at Envestnet PMC in Minneapolis. If the provisions of the 2017 law expire, which they will without congressional action, the center estimates that the number of taxpayers affected in 2026 will be roughly 6.7 million, he said.

“Many clients understand they’re getting things like their state and local income tax deduction back [when the Tax Cuts and Jobs Act expires] but then don’t realize this is an AMT add-back,” Pontius said. On the other hand, “with income tax brackets increasing, it’s possible their regular tax calculation is more than the AMT amount and they aren’t affected by the AMT changes.”

One way to reduce tax is to keep adjusted gross income as low as possible. “Deferring income to the following year, if feasible, may be a way to do this,” Lazzara said.

“Taxpayers may be able to reduce their [adjusted gross income] by contributing to retirement plans such as 401(k)s and 403(b)s. If you own your own business, you can open a solo 401(k) and may be able to contribute up to $69,000, depending on your income, with the same additional $7,500 catch-up,” she said. “Maximizing pretax contributions to flexible spending accounts and health savings accounts will also help.”

Wealthy taxpayers who have flexibility in the timing of their income might want to accelerate it so they can avoid paying the alternative minimum tax on income they earn before the tax comes back.

“This may apply to business owners who can control the amount of income they pull from their business,” Preus said. “It may also apply to taxpayers that participate in employer-sponsored deferred-compensation plans. They may choose not to participate in those plans in 2024 and 2025—[so they can] realize more income in those years—and then resume participating in 2026, lowering their income in that year to avoid getting hit by the AMT when it comes back.”

Lazzara also suggested that clients invest in tax-efficient securities, delay capital gains and make charitable donations.

“Contributing to a donor-advised fund may be a good option,” she said. “Managing the timing of exercising incentive stock options may be beneficial. And if you find yourself underpaid on estimated tax payments, be aware that the current federal interest rate [for penalties] is 8%.”

“Wealthy taxpayers should take a careful look at their long-term capital gains realization,” Preus added. The boost in income from these gains “can cause the taxpayer to unexpectedly hit the AMT exemption phaseout threshold, which would then subject more of their regular income to the AMT.” They might trigger long-term gains, for instance, if they are making portfolio changes, which means they may want to accelerate the realization of the gains.

Preus said advisors should “pay close attention to the policy debates taking place in Washington” as the income tax provisions of the Tax Cuts and Jobs Act expire.

“It is possible that there will be some compromises,” he said. “The AMT … was a very unpopular tax.”