Does Your State Have an Individual Alternative Minimum Tax?
Updated: Dec 2, 2018
Many taxpayers thought that the new Tax Cuts and Jobs Act (TCJA) would repeal the dreaded individual alternative minimum tax (AMT) entirely. Unfortunately, it did not. However, the AMT rules are now more taxpayer-friendly, and other TCJA changes reduce the odds that you will owe the AMT for years 2018 thru 2025.
The AMT is a separate tax system with a family resemblance to the more-familiar regular federal income tax system. The difference is the AMT system taxes certain types of income that are tax-free under the regular tax system and disallows some regular tax breaks.
The maximum AMT rate is “only” 28% versus the 39.6% maximum rate that applied under the prior-law regular tax regime and the 37% regular tax maximum rate that applies for 2018-2025 under the TCJA. For 2017, the maximum 28% AMT rate kicks in when AMT income exceeds $187,800 for married joint-filing couples and $93,900 for others.
Here’s How It Works
Under the federal individual alternative minimum tax (AMT), many taxpayers are required to calculate their income tax liability under two different systems and pay the higher amount. Established in 1969, the federal AMT was created when Congress discovered that a very small number of high-income taxpayers were eligible to claim so many deductions that they ended up with no federal income tax liability at all. This raised a few eyebrows and Congress passed the AMT. Under the federal AMT, the standard deduction is disallowed, and certain itemized deductions—including the state and local tax (SALT) deduction—are added back, recapturing income from taxpayers who would otherwise be eligible to claim them.
Sledge Hammer to Kill A Horsefly
Congress intentionally or not…created a sledge hammer to kill a horsefly. While the federal AMT was originally intended to be a narrow fix to a narrow problem, it was not indexed for inflation. As a result, it wasn’t long before many middle-income taxpayers found themselves having to calculate and pay an AMT. After the federal AMT was adopted, several states followed suit. This meant that some taxpayers were required to calculate their tax liability four times: twice under the federal code and twice under their state’s code.
Which States Have an Individual Alternative Minimum Tax?
Today, six states have an AMT in their individual income tax code: California, Colorado, Connecticut, Iowa, Minnesota, and Wisconsin. (Wisconsin adopted AMT repeal in 2017, effective starting in tax year 2019.)
Simple and Transparent
The original goal of AMTs was to prevent deductions from eliminating income tax liability altogether. It did not. The Alternative Minimum Tax simply added complexity and lacks transparency and neutrality. The new Tax Cuts and Jobs Act (TCJA) seeks to simplify the existing tax structure. The Tax Cuts and Jobs Act increased the federal AMT’s exemption amounts and phaseout thresholds through 2025, meaning fewer taxpayers will be required to calculate and pay the federal AMT in forthcoming years. In states that conform to the federal provision or use it as the basis for their own calculation, fewer filers will be subject to the AMT—for now thru year 2025. . Unless Congress chooses to extend it, the higher exemption amounts will sunset after 2025, a change that will also impact state tax codes again. But until then…let’s give thanks for small miracles.
Choose the Right Do-It-Yourself Tax Software
I could end with a show of numerous calculations and examples. I will not. Instead I bring you great news. Your consumer Tax Software will computer the AMT for you. Take a look at H&R Block, TaxAct, TaxSlayer, or TurboTax. All four offer web-based products, as well as mobile apps. Also Consumer Reports have furnished us with a great guide on How to Choose the Right Do-It-Yourself Tax Software
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Resources and References
Katherine Loughead | The Tax Foundation |https://taxfoundation.org/
Meet the new, friendlier Alternative Minimum Tax -AMT | MarketWatch |https://www.marketwatch.com/story/meet-the-new-friendlier-alternative-minimum-tax-2018-02-26
Steps to Take Now to Get a Jump on Next Year’s Taxes |https://www.irs.gov/individuals/steps-to-take-now-to-get-a-jump-on-next-years-taxes