Why you probably won't have to pay the AMT again

Your tax reform questions answered
Your tax reform questions answered

Under the new federal tax law, the number of tax filers hit by the Alternative Minimum Tax will drop by 96%.

Only about 200,000 tax filers are expected to owe the AMT in 2018, dramatically fewer than the 5.25 million who likely would have under the old tax law, according to estimates from the Tax Policy Center.

The AMT is a parallel tax system that requires many filers to calculate their tax bill twice -- once under the rules of the regular income tax code and once under the rules of the AMT. Filers must pay whichever is higher.

The original intent of the AMT was to ensure that the wealthy few back in 1969 didn't take so many tax breaks that they ended up owing no federal income tax.

But today, those who've typically gotten snagged by the AMT include two-earner married couples with kids in high-tax states, and more generally, households making between $200,000 and $1 million.

So why the huge drop in those affected?

The new tax law made three big changes that drastically reduce who ends up owing the AMT. But the changes expire after 2025, at which point the Tax Policy Center estimates 6 million filers will be subject to it once again.

1. Higher exemption levels

The amount of income automatically exempt from the AMT calculation has been increased to $109,400 for joint filers, up from $84,500; and to $70,300 for individual filers, up from $54,300.

Related: New estate tax law gives an enormous gift to rich families

Normally the very highest income households don't get to take advantage of the exemption levels, at least not in full. But the new law greatly expands how many of them can.

2. Higher exemption phaseout levels

The tax overhaul increases the exemption phaseout level -- which is the income level above which you gradually lose your income exemption, until it disappears completely. The phaseout levels were raised to $1 million for joint filers, up from $160,900; and to $500,000 for individuals, up from $120,700.

So a lot of households making between $200,000 and $1 million will now get to take full advantage of the exemption levels, whereas before they could not.

3. Fewer tax breaks under the regular tax code

The AMT is usually triggered for filers when they claim a lot of exemptions, credits and deductions that are aren't allowed under AMT rules.

But the new tax law eliminates a lot of those breaks, such as personal exemptions, and it has limited the value of others, such as the state and local tax deduction, said Joe Rosenberg, a senior research associate at The Tax Policy Center.

The estimated 200,000 filers who will remain in the AMT's crosshairs are likely to be very high-income households that claim large, less-than-typical tax breaks such as tax-exempt interest on private activity bonds, Rosenberg said.

Even though most filers who have been subject to the AMT in the past will not be subject to it again over the next eight years, the mere fact that it remains on the books means millions of filers will still need to calculate their tax liability twice.

So much for the oft-promised "simplification" that the new tax law would provide.

Social Surge - What's Trending

Personal Finance

LendingTree

CNNMoney Sponsors