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When talking about taxes, there are a lot of acronyms thrown around. Case in point: The AMT, short for alternative minimum tax.
Read that fast and you might be thinking of the bank machine where you get your cash.
But the AMT can actually have the opposite effect: If you get hit with it, you could owe a lot of money. Here's what it is, how it came to be, and who it is likely to affect.
What is the AMT?
The AMT is essentially a separate tax for higher-income households that is calculated in a different way from regular income tax. Basically, if you’re subject to the AMT, your taxes are calculated twice — once the regular way and once under separate AMT rules — and you pay whichever amount ends up being greater (but not both). It’s typically people in higher tax brackets who actually have to pay the AMT.
Why do we have this alternative tax calculation, anyway? Isn’t one enough?
The AMT was created in the 1960s, designed as a way of making sure the wealthiest Americans still had to pay some taxes by creating new rules around how tax brackets are determined and what kinds of deductions you can take.
The problem was that the AMT was never tied to inflation, so as people’s incomes rose over time, more and more of the middle class, and not just the wealthiest of the wealthy, began to be affected by the AMT. In 2017, almost 30% of households making between $200,000 and $500,000 were affected, compared to less than 20% of households with incomes greater than $1,000,000, according to the Tax Policy Center.
What impact did the new tax law have on the AMT?
Although lawmakers have enacted temporary rules in the past to try and soften the blow of the AMT, the Tax Cuts and Jobs Act of 2018 included some more drastic changes.
Starting in 2018, the AMT exemption (the amount of income that isn’t subject to the AMT) went up to $70,300 for individual filers and $109,400 for couples who are married filing jointly. The income ranges for when that exemption starts phasing out also went up, to a whopping $500,000 and $1,000,000, respectively.
The point of these changes was to lower the number of people who would have to pay the AMT. By some estimates, the AMT will impact an estimated 200,000 filers in 2018, versus nearly 5.25 million under the old tax law. But AMT rules are complicated, and it’s hard to predict whether you’ll actually have to pay it without going over your income and deductions with a tax pro. So if you suspect you're in this group, consider setting up some time with your accountant sooner rather than later to be sure.