The alternative minimum tax, or AMT, has long been a thorn in the side of taxpayers who are comfortable but not quite rich. President Trump, who paid a whopping $31 million in taxes under the AMT on his 2005 tax return, campaigned to eliminate the so-called shadow tax. But when the Tax Cuts and Jobs Act was signed, sealed and delivered, the AMT was still there, although the exemption levels and income thresholds were raised, and a cost-of-living adjustment was included.
How the AMT was born
Americans, overall, want tax codes to be fair and square, but income tax bills, where higher earners theoretically are supposed to pay more taxes than lower earners, haven’t always turned out that way.
In 1969, Treasury Secretary Joseph W. Barr reported that 155 taxpayers earning upward of $200,000 didn’t pay any taxes on their 1966 incomes. Back then, $200,000 was considered big money, and had the same buying power as $1.5 million does today, according to a DollarTimes inflation calculator. Many Americans were outraged that wealthy earners were finding deductions and loopholes that allowed them to pay zero taxes, while the average working guy was paying his fair share.
Enter the alternative minimum tax, a secondary tax calculation that prevented wealthy taxpayers from taking certain deductions available to others, like state and local tax deductions, and some personal and dependent exemption deductions. The AMT, in theory, would force the well-to-do to pay at least some taxes.
The problem was that the income threshold at which the AMT kicked in was never adjusted for inflation. And by 2015, 4.4 million Americans paid an AMT, kicking in an extra $7,000 on average each, according to the IRS. Households earning between $200,000 and $500,000 were most likely to be hit by the AMT. And although no one cries for a household hauling in a half million dollars each year, that couple is no longer considered rich in a society where wealth is now measured in billions, not hundreds of thousands.
When Trump became president, many taxpayers were hopeful that the new tax bill would eliminate the AMT altogether. No such luck, although income thresholds and exemption amounts have been raised.
Before the new tax law, AMT exemption amounts for 2018 would have been $86,200 for couples filing jointly and $55,400 for singles. Now, the amounts are $109,400 for couples and $70,300 for singles.
Under the old tax law, the AMT system would kick in, reducing exemptions, if income hit a $120,700 threshold for singles or $160,900 for couples. Under the new law, the threshold is $500,000 for singles and $1 million for couples.
Calculating taxes is never a day at the beach, but when an AMT is required, preparing your taxes is even more unpleasant.
