Copyright © 2017 by Robert M. Kramer
Many professionals with annual incomes from $250,000 to $800,000 pay the Alternative Minimum Tax (“AMT”) and do not realize it. Most do not understand how it works.
There are really two parallel Federal Income Tax systems: the Regular Tax and the AMT. Here is how it works. A taxpayer pays the higher of (a) the Income Tax on taxable income determined under the regular rules and rates, and (b) the Income Tax using somewhat different rules to compute the taxable amount, but with a flat rate of 26 or 28 percent.
Specifically, a taxpayer pays the tax computed under the regular rules and rates plus the additional tax, if any, of the tax computed under using the AMT rules and rates over the tax computed under the regular rules and rates. This additional tax is known as the AMT.
In computing the AMT, we need to compute the AMTI (Alternative Minimum Taxable Income). Basically, this is Taxable Income under the regular method, but with various adjustments and preferences, less the Exemption Amount, if any. For example, real estate taxes on personal residences are not deductible in computing AMTI, but may be fully or partially deductible in computing Taxable Income under the regular method. If you think the system is confusing, you are not alone.
Now for the good news. The 2017 Tax Act substantially increases the Exemption and greatly reduces the point where the Exemption begins to be phased out. The 2017 Tax Act increases the Exemption from $84,500 in 2017 to $109,400 in 2018 for married individuals filing jointly and moves the point where the Exemption begins to be phased out from $160,900 in 2017 to $1,000,000 in 2018. The Exemption reduces the AMTI, which is the amount that is subject to the 26 or 28 percent tax. Thus for most of our readers, the Exemption is $109,400.
What this means for most of our readers is that the AMT tax will not apply. To be sure, there are a number of other adjustments and preferences that could affect the determination of AMTI, but this would involve a small minority of our readers.
Robert M. Kramer is founding partner of the Kramer Green law firm in Hollywood, Fla. His law practice focuses on estate planning and wealth preservation strategies to maximize tax benefits and minimize creditor's risk. He earned his Masters of Law in Taxation from the University of Miami, and both his Juris Doctor and Bachelor's degrees from the University of Florida. He may be reached at rkramer@KramerGreen.com