United States: The "New" Alternative Minimum Tax

The 2017 Tax Act was signed into law on December 22, 2017. As part of the tax reform "simplification" process, there was a strong movement to eliminate the alternative minimum tax ("AMT") for corporations and individuals. The 2017 Tax Act does eliminate the corporate AMT but not the individual AMT. While the individual AMT was retained, it will now affect a much more narrow class of taxpayers as a result of increasing the income exemption levels as follows:

  • The AMT exemption amount for joint filers is increased from US$84,500 to US$109,700 and for single filers from US$54,300 to US$70,300.
  • More importantly, the AMT phase out level for joint filers was increased from US$160,900 to US$1,000,000 and for single filers to US$500,000 (the phase out level is that amount of alternative minimum taxable income ("AMTI") above which the AMT exemption phases out by 25¢ for each dollar of AMTI).
  • Both figures will be indexed for inflation but such changes are scheduled for sunset at December 31, 2025 at which point the 2017 AMT exemptions thresholds (indexed) will then be applicable.

The effect of the AMT exemption changes is dramatic as it is projected for 2018 that the number of taxpayers paying AMT will be reduced from 5,000,000+ to approximately 200,000. The revenue loss to Treasury as a result of the AMT changes and elimination of the corporate AMT is estimated by the Joint Committee on Taxation to be US$637 billion over the next 10 years.

The questions, therefore, are "who will remain affected by the new individual AMT" and "how does their tax profile affect the AMT calculation"?

The AMT is an alternative tax system established in 1969 as a separately calculated tax running parallel to the regular income tax. The general rationale was to ensure that all taxpayers who had the means to pay tax would in fact do so, even after taking into account tax deductions that might have otherwise eliminated their tax liability. The AMT calculation starts with taxable income as calculated for regular income tax purposes as its base and then adds back numerous "preference" items, adjustments and alternative timing items to arrive at AMTI. The exemption amount, unless phased out at higher AMTI levels, is then subtracted and this adjusted amount is then taxed at 28% (26% if AMTI for 2017 is less than US$187,500). If AMT tax is greater than regular income tax the AMT tax amount is payable. In short, the more tax deductions, credits, or exemptions a taxpayer has, the more likely they are to be in AMT.

Prior to 2018, the impact of the AMT was most significant in the case of middle to high income taxpayers (US$200,000 to US$500,000) living in states where there was a high income tax and high property tax. This impact occurred because state and local property taxes were deductible for regular income tax purposes but not for AMT tax purposes. The loss of this deduction essentially created a threshold where the 28% AMT tax on AMTI was greater than the regular income tax (taxable income in that range being taxed at rates from 35% to 39.6%) almost entirely on account of the state tax addback. With the now restructured SALT deduction limited to US$10,000 per taxpayer and the increased exemption amount/phase out threshold it is likely that this taxpayer class will not be susceptible to AMT taxation absent unusual circumstances.

The AMT also effects taxpayers with certain other adjustments or tax preference addbacks to regular taxable income in order to calculate AMTI. The most important of these addback adjustments/preferences to arrive at AMTI are:

  • Additions for virtually all itemized deductions but for home mortgage interest and charitable contributions
  • Changes to depreciation deductions as an addback related to accelerated depreciation over straight line depreciation
  • Additions for oil and gas benefits relating to deductions for depletion and intangible drilling costs
  • Additions for interest earned on "private activity" tax exempt bonds
  • Additions for income "earned" at the time of exercise of incentive stock options ("ISO")
  • Additions for amortization rather than deduction of research and development costs
  • Additions for 7% of gain amount on Section 1202 qualified small business stock sales excluded from taxable income

In addition to the above described tax preference and adjustment items that increase AMTI from the regular taxable income determination, long term capital gains and qualified dividends are subject to the same maximum 20% rate for AMT and regular income tax purposes. This rate equivalency consequently means that taxpayers with a significant amount of long term capital gains and/or qualified dividends included in their taxable income can be subject to the AMT with a minimal amount of add-on preferences or adjustments since the rate threshold discrepancy between regular income tax and AMT (37% regular rate versus 28% AMT rate) does not exist for long term capital gains or qualified dividend income.

In light of the foregoing summary of the "new" individual AMT, what types of taxpayers will likely be subject to the AMT?

  • Individual taxpayers with taxable income above US$1,000,000 because the US$109,400 exemption amount for AMTI determination does not begin to phase out until AMTI exceeds US$1,000,000 (joint filers) with a full phase-out at US$1,437,600; the increased exemption and phase-out thresholds also do not apply to trusts
  • Taxpayers with significant active investments in oil or gas because the preferences for oil and gas are added back to taxable income to arrive at AMTI
  • Taxpayers with significant investments in municipal bonds that are characterized as private activity bonds
  • Taxpayers with significant investment in depreciable properties and particularly depreciable personal properties
  • Taxpayers realizing a significant profit at the time of ISO exercise since the "profit" is not includible in taxable income but is includible in AMTI
  • Taxpayers recognizing a significant gain on the disposition of Section 1202 stock as 7% of that income otherwise excluded from taxable income is added back to AMTI
  • Taxpayers with a high percentage of long term capital gains and qualified dividends in proportion to other income types since there is no rate differential with taxation at 20% for taxable long term capital gains and qualified dividends between the regular income tax and the AMT

The foregoing suggests that the AMT exemption/threshold changes in the 2017 Tax Act are intended to repurpose the AMT to what was intended with its initial passage in 1969. The AMT began in 1969 as an alternative tax that was intended to ensure that ultra-high net worth taxpayers would still have to pay a base tax regardless of their claimed deductions. The increase in the AMT exemptions and thresholds now means that approximately 96% of households previously subject to AMT will no longer be paying this tax until 2026 when the 2017 AMT rules return. Nevertheless, many ultra-high income taxpayers will remain subject to the individual AMT. To address this, such ultra-high income taxpayers may want to actively consider the timing of stock and asset sales that generate capital gains and also anticipate the timing of expenses and potential tax deductions. There are also timing considerations associated with options, such as incentive stock options (commonly referred to a ISOs).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Arnold & Porter
Stoel Rives LLP
Kramer Levin Naftalis & Frankel LLP
Stroock & Stroock & Lavan LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Arnold & Porter
Stoel Rives LLP
Kramer Levin Naftalis & Frankel LLP
Stroock & Stroock & Lavan LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions