The Dreaded AMT Will Hit More Taxpayers Under the New Tax Law

The U.S. Capitol during the procedural vote on the One Big Beautiful Bill Act on Wednesday. (Kayla Bartkowski/Getty Images)

The alternative minimum tax (AMT) will have a little more bite once the tax bill passed by Congress is signed into law by President Donald Trump.

Provisions to sharply limit the AMT’s impact—enacted in 2018 under the Tax Cuts and Jobs Act and set to expire at the end of this year—would be made permanent under the proposed bill.

That’s good news for most individual taxpayers.

The bad news is that some folks who haven’t faced the AMT for years, or ever, will be subject to the tax not only due to tweaks in the AMT rules, but also to another major change under the bill: an increase in the cap on deductions for state and local taxes (SALT) to $40,000 from $10,000.

Generally, the higher deductions are relative to income, the more likely a taxpayer is to pay the AMT.

“Some people think they’re going to get a huge benefit from the higher SALT cap, but it may push them into the AMT and they won’t get much of a benefit,” says Brian Schultz, a tax partner at Plante Moran.

The AMT is a tax system that operates parallel to the income-tax system. Taxpayers are required to calculate taxes using both income-tax rules and AMT rules, and pay whichever tax bill is higher.

While the top AMT tax rate at 28% is lower than the 37% top income-tax rate, most deductions aren’t allowable to reduce your taxable income under the AMT.

“What would happen with the bigger SALT deduction is your regular tax bill will get lower but your AMT tax bill won’t change, making it more likely you’ll have to pay the AMT,” Schultz says.

The AMT was created in 1969 after the Treasury Department reported that some wealthy individuals who took advantage of tax loopholes paid no income taxes.

While the AMT’s goal was to ensure the nation’s wealthiest paid their tax share, AMT rules weren’t revised over the years to keep up with inflation and other changes in the tax code.

That caused the AMT burden to increasingly fall on individuals for whom it was never intended instead of the wealthiest taxpayers.

By 2017, 88% of households earning between $200,000 and $1 million a year were subject to the AMT, compared with 25% of those earning more than $1 million, according to the Tax Policy Center.

The Tax Cuts and Jobs Act, passed under President Trump in 2017 and effective in 2018, increased the AMT exemption amount and made the exemption available to more taxpayers by significantly raising the income threshold at which it begins phasing out.

Currently, the AMT exemption is $137,000 for married couples filing jointly and $88,100 for singles, and the phaseout begins at incomes of $1,252,700 for couples and $626,350 for singles.

In contrast, in 2017, the exemption was $84,500 for couples and $54,300 for singles, and it began phasing out at incomes of $160,900 and $120,700 respectively.

The proposed bill would maintain current exemption levels, but the income level at which the exemption phaseout begins would return to 2018 levels of $1 million for couples filing jointly and $500,000 for singles. Inflation adjustments would begin in 2027.

The bill would also accelerate the phaseout of the exemption, at a rate of 50% a year up from 25% a year.

“The changes are still much more generous than under the old AMT prior to the 2017 tax law, but slightly less generous than the rules in place this year,” says Garrett Watson, director of policy analysis at the Tax Foundation.

The bill’s changes to the AMT exemption’s income threshold and phaseout rate are likely to raise taxes by about $12.1 billion over 10 years relative to if the threshold and rate remained at their current levels, according to the Tax Foundation.

Still, compared with reverting to old AMT rules before the 2017 law went into effect, the bill’s AMT changes mean a $1.3 trillion tax cut over the next 10 years, Watson says.

Who might fall subject to the AMT if the bill is enacted?

“This shouldn’t impact most taxpayers, but if it does it would be joint filers in the $400,000 to $800,000 income range,” says Joe Perry, national tax leader at CBIZ.

Couples earning less than $400,000 should be largely protected from the AMT by the exemption, and those earning more will likely have higher taxable income under the income tax because more of their income is taxed at the top 37% rate. Single filers will be more likely to face the AMT at a somewhat lower income range.

Generally, if you live in a high income tax state and have high property taxes, you’re more likely to be subject to the AMT, because your deductions will be high relative to your income.

In addition, certain types of income count only for AMT calculations—not for regular income-tax calculations—and can therefore trigger the AMT, Schultz says.

For example, if you exercise incentive stock options and don’t sell them in the same year, the difference between what you paid for the options and their value on the date you exercise is factored as income for AMT purposes.

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