I would love to have written “peace,” but there is nothing peaceful about the Alternative Minimum Tax (AMT).
Who’s Likely to Be Subject to AMT Going Forward
While the AMT was technically not eliminated from the tax code, for practical purposes it was for the majority of taxpayers. If you were subject to AMT in 2017, you will most likely not be subject to it in 2018. Let’s look a bit deeper across three cases where a married taxpayer lives in a high-tax state and reports $300,000, $400,000 and $600,000 of income. Let’s also assume this taxpayer claims itemized deductions of their state income taxes plus $5,000 in real estate taxes. The results are summarized in the table below.
AMT Case Studies Summary
| Header Cell - Column 0 | Case #1 | Case #2 | Case #3 | |||
|---|---|---|---|---|---|---|
| Row 0 - Cell 0 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 |
| Ordinary Income(wages, social security, pensions, IRA distributions, etc.) | $100,000 | $100,000 | $200,000 | $200,000 | $200,000 | $200,000 |
| Dividends/Long-Term Capital Gains | $200,000 | $200,000 | $200,000 | $200,000 | $400,000 | $400,000 |
| Adjusted Gross Income | $300,000 | $300,000 | $400,000 | $400,000 | $600,000 | $600,000 |
| Deductions | $26,258 | $24,000 | $33,522 | $24,000 | $47,222 | $24,000 |
| Taxable Income | $273,742 | $276,000 | $366,478 | $376,000 | $552,778 | $576,000 |
| Row 6 - Cell 0 | Row 6 - Cell 1 | Row 6 - Cell 2 | Row 6 - Cell 3 | Row 6 - Cell 4 | Row 6 - Cell 5 | Row 6 - Cell 6 |
| Federal Tax(Regular + AMT) | $44,648 | $40,459 | $81,272 | $66,519 | $129,648 | $108,969 |
| AMT Included Above | $2,946 | $- | $12,074 | $- | $22,572 | $- |
| % decrease in Federal Tax | Row 9 - Cell 1 | 9% | Row 9 - Cell 3 | 18% | Row 9 - Cell 5 | 16% |
| Row 10 - Cell 0 | Row 10 - Cell 1 | Row 10 - Cell 2 | Row 10 - Cell 3 | Row 10 - Cell 4 | Row 10 - Cell 5 | Row 10 - Cell 6 |
| Marginal Rate - Federal | 26% | 12% | 26% | 24% | 28% | 24% |
| Effective Rate - Federal | 16% | 15% | 22% | 18% | 23% | 19% |
In all cases, the taxpayer stopped paying AMT in 2018. This contributed to a reduction in the federal tax liability by 9% to 18% across the cases, even though the taxpayer ended up claiming less deductions (standard in 2018 vs. itemized in 2017). Most importantly, however, is that marginal rates decreased, making 2018 and future years a great time to potentially reduce or eliminate taxes from your retirement.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Despite these changes, a few taxpayers will still find the AMT to be part of their financial life. The most common will be:
- individuals who exercise Incentive Stock Options (ISOs)
- oil and gas investors who have depletion and intangible drilling costs
- investors owning private activity bonds
- and business owners with assets having different depreciation lives for regular versus AMT purposes
Some Possible Investment Moves to Consider
As part of a comprehensive review of how the TCJA impacts your personal situation, the structure of your investment portfolio should not be left behind. With regard to the equity portion of your portfolio, investors will want to re-evaluate the types of securities they own. Tax-efficient investors typically want to control and minimize the amount of capital gains realized each year. For individuals previously vulnerable to AMT, this was critical. Now that this is a much less likely to occur, investors should evaluate if different security types provide economic benefits that generate better after-tax returns.
With regard to the fixed-income portion of your portfolio, investors will want to re-evaluate their ownership of tax-exempt vs. taxable bonds. Many investors subject to AMT owned tax-exempt bonds to avoid the AMT exemption phase-out that occurs when interest income from taxable bonds is earned. Since there is now more capacity for taxable interest before AMT would apply, taxpayers will want to understand their after-tax rate of return on income investments as the spread between tax-exempt and taxable bonds may have closed considerably. Additionally, many investors subject to AMT also avoided owning Private Activity Bonds (PAB) as they were an AMT add back. They still are, but given the larger AMT exemption and high income phase-outs, investors will now likely have more capacity for owning these bonds before becoming subject to AMT.
It Could be Time to Restructure Fee Arrangements with Your IRAs
Many investors purposely paid the fee of their traditional and Roth IRAs out of a non-qualified investment account in order to maximize the income tax deduction for investment management fees. To the extent this amount, plus the other miscellaneous deductions exceeded 2% of AGI, the individual would have received a financial benefit, but only up until this deduction made the individual subject to AMT. Now that this deduction is no longer allowed, investors will want to evaluate the account(s) from which their investment fees are paid to optimize the tax benefits afforded these accounts. In most cases, investors will want to pay their traditional IRA fee out of their traditional IRA instead of the non-qualified investment account.
Will AMT Become Frankenstein Again?
As was previously noted, the AMT relief provided by the new tax law is temporary, with a scheduled termination date of Dec. 31, 2025. Consequently, if Congress does nothing, the AMT will resuscitate itself and live to terrorize another day. In the meantime, let’s enjoy this eight-year vacation from AMT and make a point to take advantage of the potential opportunities that exist.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal adviser.
-
Donating Complex Assets Doesn't Have to Be ComplicatedIf you're looking to donate less-conventional assets but don't know where to start, this charity executive has answers, such as considering a donor-advised fund (DAF) for its tax benefits and ease of use.
-
Travel trends you can expect this summerThe Kiplinger Letter Domestic trips will trump foreign travel amid economic uncertainties, though some costs are down.
-
Donating Complex Assets Doesn't Have to Be Complicated
If you're looking to donate less-conventional assets but don't know where to start, this charity executive has answers, such as considering a donor-advised fund (DAF) for its tax benefits and ease of use.
-
Think a Repeal of the Estate Tax Wouldn't Affect You? WrongThe wording of any law that repeals or otherwise changes the federal estate tax could have an impact on all of us. Here's what you need to know, courtesy of an estate planning and tax attorney.
-
In Your 50s? We Need to Talk About Long-Term CareMany people don't like thinking about long-term care, but most people will need it. This financial professional recommends planning for these costs as early as possible to avoid stress later.
-
Social Security Pop Quiz: Are You Among the 89% of Americans Who'd Fail?Shockingly few people have any clue what their Social Security benefits could be. This financial adviser notes it's essential to understand that info and when it might be best to access your benefits.
-
Such Attractive Yields in High-Grade Munis Are Rare and May Not Last LongAccording to this munis expert, the last time munis were this cheap was a brief period in 2023. If you kicked yourself for missing out then, you have a second chance now.
-
Financial Analyst Sees a Bright Present for Municipal Bond InvestorsHigh-tax-bracket investors have an excellent opportunity to secure low-volatility, high-quality returns at yield levels rarely seen in over a decade.
-
I'm an Insurance Pro: How Not to Get Dumped by Your Insurance AgentYour insurance agent or broker might show you the door if you do any of these five things. Being a good customer is about more than paying your bill on time.
-
Two Estate Planning Issues You Should Never OverlookThis estate planning attorney explains why proper asset titling and beneficiary designations make a big difference when it's time to transfer your wealth.
