Your wealthy clients may know the name of the alternative minimum tax (AMT) but not its impact or how it’s about to change.
The most recent AMT was designed 36 years ago to help insure that high-net-worth individuals don’t lower their tax bills with too many deductions. Under this alternative tax regime, certain deductions are disallowed (called AMT adjustments) to determine if any additional tax is owed.
“We like to explain it as a taxing structure that parallels the regular tax but utilizes different tax rates, includes certain adjustments and excludes certain deductions, the most prominent of which are the itemized deductions for taxes and miscellaneous expenses,” said Barry Kleiman, CPA and principal at Untracht Early in Florham Park, N.J. “The tax liability is computed under both regular and AMT and you pay the higher of the two.”
“Over time, the scope of the AMT has expanded far beyond the original intent,” said Scott Paterson, tax manager with WithumSmith+Brown in Red Bank, N.J.
Added Randi Schuster, principal in the New York office of Baker Tilly Virchow Krause, “Income may also become subject to the AMT if it consists of all investment income taxed at the preferential 20 percent rate.”
The AMT top rate is at 28 percent. For years, the tax was never indexed for inflation, but The American Taxpayer Relief Act of 2012 not only raised the AMT exemption amount, but also indexed it for inflation, says the Tax Policy Center of the Urban Institute and Brookings Institution. The TPC estimated about 5 million people were subject to the AMT in 2017.
Those earning $500,000 to $1 million are most likely to incur the AMT. Recent tax reform increased exemptions to $70,300 for those with Single tax filing status, $109,400 for those filing Married Filing Jointly and $54,700 for Married Filing Single. Phase-outs (where the exemptions are trimmed) were also increased to start at $1 million for married couples and $500,000 for all other taxpayers (other than estates and trusts).
Reform basically means the AMT may affect far fewer taxpayers, said Wade Egmon, CPA/CFP and client service manager at Goodman Financial Corporation in Houston and member of the Texas Society of CPAs.
Common adjustments for determining AMT include: the standard deduction, personal and dependency exemptions, state taxes, real estate taxes, and miscellaneous itemized deductions such as investment fees, accountant fees, unreimbursed business expenses, tax refunds, incentive stock options, tax exempt bond interest from private activity bonds and oil and gas benefits.
“Certain HNW clients use the AMT’s lower marginal rate to their advantage by earning additional income and paying tax at a rate of 28 percent rather than 39.6 percent,” noted Kenneth Burstiner, CPA/CFP and director with Citrin Cooperman in New York. Tax planning that involves timing the payment of AMT tax preferences and adjustments is a common practice in minimizing the impact of the AMT, he added.