Section e 6 , referred to in subsec. D and E of section 63 c 1 , referred to in subsec. Section , referred to in subsec. H of section b 1 , referred to subsec. The date of the enactment of the Tax Reform Act of , referred to in subsec. For complete classification of this Act to the Code, see Short Title of Amendments note set out under section 1 of this title and Tables. A prior section 56, added Pub. D as C and struck out former subpar.
Understanding the New Tax Code: Changes to the Alternative Minimum Tax - Marks Paneth
Prior to amendment, text of subpar. C read as follows: Text read as follows: See Amendment note below. Prior to amendment, subcl. I read as follows: See Amendment note above. Prior to amendment, subpar. A read as follows: This paragraph shall not apply to any disposition with respect to which an election is in effect under section l 2 B. Prior to amendment, cl. I and J as H and I , respectively. F read as follows: Prior to amendment, text read as follows:.
Prior to amendment, text read as follows: G and H as F and G , respectively, and struck out former subpar. F which provided that acquisition expenses for life insurance companies be capitalized and amortized in accordance with the treatment generally required under generally accepted accounting principles as if this subparagraph applied to all taxable years. Prior to amendment cl. The preceding sentence shall not apply to any annuity contract which is held under a plan described in section a or which is described in section 72 u 3 C.
D generally, in cl. IV relating to inapplicability of pars. IV and V , which read as follows:. G read as follows: B as A and struck out former subpar. C which read as follows: I and redesignated former subpar. Prior to amendment, par. This paragraph shall not apply to any disposition with respect to which an election is in effect under section C e 4. H and redesignated former subpar. Amendment by section b 7 , 8 A of Pub. Amendment by section a 9 , 25 B , 30 C of Pub. Such election shall be effective for the taxable year for which made and all subsequent taxable years, and, once made, may be revoked only with the consent of the Secretary of the Treasury.
The preceding sentence shall not apply to earnings and profits acquired in a transaction after September 30, , to which section applies unless the distributor or transferor corporation was immediately before the transaction a foreign corporation to which this paragraph applies. The preceding sentence shall cease to apply as of the date that the domestic corporation referred to in clause ii ceases to wholly own directly or indirectly such controlled foreign corporation. Amendment by section d 1 of Pub. Amendment by section b 2 B , C of Pub. Amendment by section b 2 of Pub.
Amendment by section c 1 , e 1 A , g 4 , and h 12 of Pub. Amendment by section b of Pub.
A similar reduction shall be made in the amount amortized for such taxable year under such [former] section 56 g 4 F. Amendment by section b 4 of Pub. The preceding sentence shall apply only if the ownership change or acquisition is pursuant to the plan approved in such proceeding and is before the date 2 years after the date on which the petition which commenced such proceeding was filed.
Amendment by sections d 3 and e 2 , 4 of Pub. Amendment by sections a 12 and b 1 — 13 , 15 — 19 of Pub. Amendment by section d of Pub. Section applicable to taxable years beginning after Dec. For provisions that nothing in amendment by sections and of Pub. For applicability of amendment by section a of Pub.
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II switching to the straight line method for the 1st taxable year for which using the straight line method with respect to the adjusted basis as of the beginning of the year will yield a higher allowance. Under the AMT, no deduction is allowed for personal exemptions other than the AMT specific exemption, which is larger than the personal exemption except for high income taxpayers , nor is the standard deduction. However, most other itemized deductions apply at least in part. Significant other adjustments to income and deductions apply.
The form is also filed to claim the credit for prior year AMT. Other individual adjustments in computing AMT include: Many AMT adjustments apply to businesses operated by individuals or corporations. Certain other adjustments apply. Corporations are also subject to an adjustment up or down for adjusted current earnings. AMT is reduced by a foreign tax credit , limited based on AMT income rather than regular taxable income.
A predecessor "minimum tax" was enacted by the Tax Reform Act of [19] and went into effect in Treasury Secretary Joseph Barr prompted the enactment action with an announcement that high-income households had not paid a dime of federal income taxes. The prior treatment imposed no limit on the amount of income which an individual or corporation could exclude from tax as the result of various tax preferences.
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As a result, there were large variations in the tax burdens placed on individuals or corporations with similar economic incomes, depending upon the size of their preference income. In general, those individual or corporate taxpayers who received the bulk of their income from personal services or manufacturing were taxed at relatively higher tax rates than others.
On the other hand, individuals or corporations which received the bulk of their income from such sources as capital gains or were in a position to benefit from net lease arrangements, from accelerated depreciation on real estate, from percentage depletion, or from other tax-preferred activities tended to pay relatively low rates of tax. In fact, many individuals with high incomes who could benefit from these provisions paid lower effective rates of tax than many individuals with modest incomes.
In extreme cases, individuals enjoyed large economic incomes without paying any tax at all. Similarly, a number of large corporations paid either no tax at all or taxes which represented very low effective rates. The AMT has undergone several changes since The current structure of the AMT reflects changes that were made by the law. However both participation and revenues from the AMT temporarily plummeted after the changes. For years since then, Congress had passed one-year "patches" aimed at minimizing the impact of the tax.
While not automatically indexed for inflation until a change in the law in early , the exemption had been increased by Congress many times. In addition, the tax rate was increased for individuals effective and , and the tax was limited for capital gains and qualifying dividends in For the tax year, the patch was passed on December 20, , but only after the IRS had already designed its forms for The IRS had to reprogram its forms to accommodate the law change.
Alternative minimum tax AMT [36] is imposed on an alternative, more comprehensive measure of income than regular federal income tax. Conceptually, it is imposed instead of, rather than in addition to, regular tax. AMT is imposed if the tentative minimum tax exceeds the regular tax. Regular tax is the regular income tax reduced only by the foreign and possessions tax credits. This credit may not reduce regular tax below the tentative minimum tax. Alternative minimum taxable income is regular taxable income, plus or minus certain adjustments, plus tax preference items, less the allowable exemption as phased out.
Individuals, C corporations, estates, and trusts are subject to AMT. Partnerships and S corporations are generally not subject to income or AMT taxes, [38] but, instead, pass-through the income and items related to computing AMT to their partners and shareholders. The rate of AMT varies by type of taxpayer. The deduction for personal exemptions is not allowed. Instead, all taxpayers are granted an exemption that is phased out at higher income levels. Due to the phase-out of exemptions, the actual marginal tax rate 1.
The married-filing-separately MFS phase-out does not stop when the exemption reaches zero, either in or This is because the MFS exemption is half of the joint exemption, but the phase-out is the full amount, so for MFS filers the phase-out amount can be up to twice the exemption amount, resulting in a 'negative exemption'. This prevents a married couple with dissimilar incomes from benefiting by filing separate returns so that the lower earner gets the benefit of some exemption amount that would be phased out if they filed jointly.
When filing separately, each spouse in effect not only has their own exemption phased out, but is also taxed on a second exemption too, on the presumption that the other spouse could be claiming that on their own separate MFS return. Small corporations are exempt from AMT.
Once a corporation ceases to be a small corporation for AMT, it is never again a small corporation. This limit is applied to all members of an affiliated group as if they were a single corporation. All taxpayers claiming deductions for depreciation must adjust those deductions in computing AMT income to the amount of deduction allowed for AMT. When a taxpayer is required to recognize gain or loss on disposal of a depreciable asset or pollution control facility , the gain or loss must be adjusted to reflect the AMT depreciation amount rather than regular depreciation amounts.
In addition, corporate taxpayers may be required to make adjustments to depreciation deductions in computing the adjusted current earnings ACE adjustment. Individuals are not allowed certain deductions in computing AMT that are allowed for regular tax. The phase-out of itemized deductions does not apply. No deduction is allowed for state, local, or foreign income or property taxes. A recovery of such taxes is excluded from AMTI. No deduction is allowed for most miscellaneous itemized deductions.
Interest expense deductions for individuals may be adjusted. This includes interest resulting from refinancing such debt. In addition, investment interest expense is deductible for AMT only to the extent of adjusted net investment income. Other non-business interest is generally not deductible for AMT.
An adjustment is also made for qualified incentive stock options and stock received under employee stock purchase plans. Circulation and research expenses must be capitalized and amortized. Corporations are required to make an adjustment based on adjusted current earnings ACE. These include further depreciation adjustments for most assets, adjustments to more closely reflect earnings and profits, cost rather than percentage depletion, LIFO, charitable contributions and certain other items.
The deduction for net operating losses is adjusted to be based on losses for AMTI. Farm losses are limited for AMT purposes. Certain adjustments apply with respect to farm and passive activity loss rules for insolvent taxpayers. All taxpayers must add back tax preference deductions in computing AMTI. Taxpayers may elect an optional year write-off of certain tax preference items in lieu of the preference add-back. Note that in prior years there were certain other tax preference items relating to provisions now repealed.
Credits are allowed against AMT for foreign taxes [56] and certain specified business credits. Thus, all adjustments and tax preference items above must be applied in computing the AMT foreign tax credit limitation. Taxpayers may use a simplified method under which the AMT foreign tax credit limit is computed proportionately to the regular tax foreign tax credit limit.
IRS Form is used to claim this credit. The alternative minimum tax may apply to individuals exercising stock options. Under AMT rules, for incentive stock options at the time of exercise, the "bargain element" or "spread price" the difference between the strike price and fair market value is treated as an AMT adjustment, and therefore needs to be added to the AMT calculation even though no ordinary income tax is due at the time of exercise.
In contrast, under the regular tax rules capital gains taxes are not paid until the actual shares of stock are sold. The AMT was designed to prevent people from using loopholes in the tax law to avoid tax. However, the inclusion of unrealized gain on incentive stock options imposes difficulties for people who cannot come up with cash to pay tax on gains that they have not realized yet. As a result, Congress has taken action to modify the AMT regarding incentive stock options.
In and , people exercised incentive stock options and held onto the shares, hoping to pay long-term capital gains taxes instead of short-term capital gains taxes. In the Nortel example given above, the individual would receive a credit for the AMT paid when the individual did eventually sell the Nortel shares.
However, given the way AMT carryover amounts are recalculated each year, the eventual credit received is in many cases less than originally paid. In the Nortel example above, the taxpayer could have avoided problems by selling sufficient stock to cover the AMT liability immediately upon exercising the stock options. In such a case, it may be effectively impossible for the employee to exercise the option unless he or she has enough cash with which to pay the AMT. Although the AMT was originally enacted to target high-income households, it now affects millions of families each year.
The number of households that pay the tax has increased significantly in the last decade: In , for example, , taxpayers paid the AMT; [61] by , the number of affected taxpayers jumped to 3. The primary reason for AMT growth is the fact that the AMT exemption, unlike regular income tax items, was not indexed to inflation before This means that income thresholds did not keep pace with the cost of living. While not indexed for inflation, Congress often passed short-term increases in exemption amounts. The Tax Policy Center a research group estimated that if the AMT had been indexed to inflation in , and if the Bush tax cuts had not gone into effect, only , taxpayers—instead of their projected 27 million—would be subject to the tax in Another important reason for the recent expansion of the AMT is the effect of the — Bush tax cuts.
The lower tax liabilities triggered AMT eligibility for many households. Economists often refer to this as the "take-back effect" of the Bush tax cuts. As the AMT has expanded, the inequalities created by the structure of the tax have become more apparent. Taxpayers are not allowed to deduct state and local taxes in calculating their AMT liability; as a result, taxpayers who live in states with high income tax rates are up to 7 times more likely to pay the AMT than those who live in states with lower income tax rates.
The AMT rate has not been changed at the same times as regular income tax rates. The tax cut passed in lowered regular tax rates , but did not lower AMT rates. As a result, certain people are affected by the AMT who were not the intended targets of the laws. People with large deductions, particularly those resident in states or cities with high income tax rates, or those with nonqualifying mortgage interest deductions, are most affected.
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The AMT also has the potential to tax families with large numbers of dependents usually children , although in recent years, Congress has acted to keep deductions for dependents, especially children, from triggering the AMT. Because the AMT was not indexed to inflation until , and because of recent tax cuts, [21] [68] an increasing number of middle-income taxpayers have been finding themselves subject to this tax.
The lack of indexing produces bracket creep. The recent tax cuts in the regular tax have the effect of causing many taxpayers to pay some AMT, reducing or eliminating the benefit from the reduction in regular rates. In all such cases, however, the overall tax payable will not increase. The Advocate noted that the AMT punishes taxpayers for having children or living in a high-tax state and that the complexity of the AMT leads to most taxpayers who owe AMT not realizing it until preparing their returns or being notified by the IRS.
Over the coming decade, a growing number of taxpayers will become liable for the AMT. Rather than affecting only high-income taxpayers who would otherwise pay no tax, the AMT has extended its reach to many upper-middle-income households. As an increasing number of taxpayers incur the AMT, pressures to reduce or eliminate the tax are likely to grow. However, CBO's rules [72] state that it must use current law in its analysis, and at the time the above text was written, the AMT threshold was set to expire in and be reset to far lower values.
In , when President Ronald Reagan and both parties on Capitol Hill agreed to a major change in the tax system, the law was subtly changed to aim at a wholly different set of deductions, the ones that everyone gets, like the personal exemption, state and local taxes, the standard deduction, certain expenses like union dues and even some medical costs for the seriously ill.
At the same time it removed and revised some of the exotic investment deductions. A law for untaxed rich investors was refocused on families who own their homes in high tax states. A further shift, involving many definitional changes and extensive reorganization, occurred with the Tax Reform Act of A further criticism is that the AMT does not even affect its intended target. Congress introduced the AMT after it was discovered that 21 millionaires did not pay any US income tax in as a result of various deductions taken on their income tax return.
Since the marginal rate of persons with one million dollars of income is Determining whether one is subject to the AMT can be difficult.