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Exemption Amounts and Permanent Patch AMT §55

Exemption Amounts and Permanent “Patch” AMT  §55

 

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   By John Wolf

An alternative minimum tax is a parallel income tax system, which does not allow certain regular tax system deductions, and is imposed on an individual, estate, or trust in an amount by which the tentative minimum tax exceeds the regular income tax for the taxable year.

The tentative minimum tax is the sum of:

(1) 26% of so much of the taxable excess as does not exceed $95,550 for 2018

(up from $93,900 in 2017) in the case of a married individual filing a separate

return and $191,100 in 2018 (up from $187,800 in 2017) for all other returns, and

(2) 28% of the remaining taxable excess (R.P. 2018-18).

Note: Formerly, a single rate of 20% applied to corporations. However, for 2018 and later, the AMT is repealed for corporations.

Quotes “The taxable excess is so much of the alternative minimum taxable income (“AMTI”) as exceeds an exemption amount. 9 Exemption Amounts & Permanent “Patch” – §55(d)(1)”

Originally made to ensure that wealthy taxpayers did not escape paying any taxes, increasingly the AMT annually threatened middle-income taxpayers because it lacked inflation adjustment. Congress reacted by sporadically enacting “patches” to the AMT exemption amounts to protect such taxpayers. In 2012, Congress once again inflation-adjusted the AMT exemption amounts, but with a major difference – the “patch” is permanent, and the AMT exemption amounts are indexed for inflation after 2012. Annual “patches” are no longer be needed.

For 2018, exemption amounts (now inflation adjusted & recently increased

by the TCJA) are:

(1) $109,400 (up from $84,500 in 2017) in the case of married individuals filing a joint return and surviving spouses;

(2) $70,300 (up from $54,300 in 2017) in the case of single or head of households;

(3) $54,700 (up from $42,250 in 2017) in the case of married filing separately (i.e., 50% of married filing jointly), and

(4) $24,600 (up from $24,100 in 2017), in the case of an estate or trust.

(R.P. 2017-58).

AMT Exemption Phaseout – §55(d) & §59(j)

The 2018 exemption amounts are phased out by an amount equal to 25% of the amount by which AMTI exceeds:

(1) $1 million (up from $160,900 in 2017) in the case of married individuals filing a joint return and surviving spouses,

(2) $500,000 (up from $120,700 in 2017)in the case of single or head of households,

(3) $500,000 (up from $80,450 in 2017) in the case of married filing separately, and

(4) $82,050 (up from $80,450 in 2017), if an estate or trust (R.P. 2017-58).

Note: The TCJA did not affect the AMT exemption amount and phaseout

the threshold for an estate or trust.

Thus, in 2018, the exemption amount is completely phased out if AMT taxable income exceeds:

(1) $1,437,600 (up from $498,900 in 2017), if married filing a joint return or a qualifying widow or widower,

(2) $781,200 (up from $337,900 in 2017), if single or head of household,

(3) $718,800 (up from $249,450 in 2017), if married filing a separate return, and

10(4) $180,450, if an estate or trust.

AMT & Personal Credits

Under prior law, certain nonrefundable personal credits (including a dependent care credit and the elderly and disabled credits) were not allowed directly against the AMT but only permitted to the extent that regular income tax liability exceeded the tentative minimum tax. However,

Congress typically enacted temporary provisions authorizing such credits to offset the entire regular and AMT liability. Since 2013, this offset is permanent.

 New Inflation Adjustment

Quote “Many parameters of the tax system are adjusted for inflation to protect taxpayers from the effects of rising prices. Most of the adjustments are based on annual changes in the level of the Consumer Price Index for All Urban Consumers (“CPI-U”)”.

Quotes “The CPI-U is an index that measures prices paid by typical urban consumers on a broad range of products and is developed and published by the Department of Labor” For 2018 and later, The Chained Consumer Price Index for All Urban Consumers (“C-CPI-U”) must be used to adjust tax parameters currently indexed by the CPI-U. The C-CPI-U differs Quotes “from the CPI-U in accounting for the ability of individuals to alter their consumption patterns in response to relative price changes.”

Wage Base for Social Security & Medicare Taxes

The social security contribution and benefit base for remuneration paid and self-employment income earned in tax years beginning in 2018 are $128,700 (up from 127,200 in 2017). There is no limit on the number of wages subject to the Medicare tax.

Note: For 2017 & 2016, the domestic employee coverage threshold, as ad-

Justed for inflation, is 2,000. This reflects an increase from $1,900 for 2014 &

2015. Earnings below the domestic employee coverage threshold are not

taxable under Social Security (§3121).

Earned Income Tax Credit – §32

An earned income tax credit is available to low-income workers who satisfy certain requirements. One in six taxpayers claims Quotes IRS “the EITC, which, unlike most tax breaks, is refundable, meaning that individuals can get it even if they owe no tax and even if no tax is withheld from their paychecks.” However, the amount of the EITC varies depending upon the taxpayer’s earned income and whether the taxpayer has one, two, more than two, or no qualifying children.

Quotes 11The EITC generally equals a specified percentage of earned income up to a maximum dollar amount. The maximum amount applies over a certain income range and then diminishes to zero over a specified phaseout range.

For taxpayers with earned income (or adjusted gross income (“AGI”), if greater) in excess of the beginning of the phaseout range, the maximum EITC amount is reduced by the phaseout rate multiplied by the amount of earned income (or AGI, if greater) in excess of the beginning of the phaseout range. For taxpayers with earned income (or AGI, if higher) more than the end of the phaseout range, no credit is allowed.

A temporary provision allowed taxpayers with three or more qualifying children to claim a credit of 45% for taxable years 2009 through 2017. The phase-out thresholds for married couples were also temporarily raised and indexed. In 2015, these temporary provisions were made permanent.

As a result, the earned income base amounts, credit percentages, and phase-out information in 2018 for married filing jointly are as follows:

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