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Whether you will owe the AMT in 2017 and why we should keep it

November 7, 2017

Will you owe the AMT in 2017?

 If you are reading this blog, probably not.  But maybe, especially in a higher tax state with a higher AGI.  I was pretty shocked when we owed a small increase in tax due to the AMT in year 2014 (one time significant income).  It is also something that we run into if we try to bunch our property taxes, so we are moderately close most years, it seems.

Here is an easy answer for a limited (but common) situation where your itemized deductions are limited to:

  • Mortgage Interest on your primary residence
  • Charity
  • Property Taxes
  • State and Local Taxes
  • Personal Exemptions (not technically a deduction, but you lose them under the AMT scenario)

Find your taxable income (AGI minus all colors of deductions listed above) on the x-axis. Add up the numbers in blue in my list above.  If your numbers in blue fall below the blue line, you probably don’t owe the AMT if you are married filing joint.  More likely, double check the math yourself to be sure.  I am not a tax professional! This works if you have other deductions, but you have to figure out how the AMT impacts each one.   You also have to add back in qualified incentive stock options and stock received under employee stock purchase plans, and some other things. This is a simplified view.

AMT Trigger All

My goal in creating this chart was to gain intuition on what drives the AMT.  If you have a lower taxable income, you are unlikely to have enough deductions to trigger it.   As your income increases, the value you can deduct before hitting the AMT shrinks.  If your are higher income but not astronomically rich, you just might be able to trigger it with enough kids/state/property taxes. Keep in mind that this chart includes the value of personal exemptions – $8,100 for a married couple and more for each kids.  Once you hit ~$500k, you are likely to do worse under the normal tax system unless you deduct very large amounts of money (more on that below). This is because the highest tax bracket under the AMT is 28%, while it is 39.5% for the normal tax system.

It is hard to compare apples to apples, but we can find the break even point for your taxable income under the regular system compared to your AMT taxable income for the same tax.  The chart below does that – at what taxable income in each system are your tax bills equivalent?  The chart above plots the difference so it is more readable.

BreakevenAMT

Why we should keep the AMT

With this insight, the proposal to eliminate the AMT doesn’t make sense.  After all, it seems reasonable that at high incomes, you maybe shouldn’t get to deduct quite so many things.  Further, while people like me may occasionally get hit with relatively small AMT bills, most of the AMT revenue comes from higher earners.  About 30% of households between $200-$500k will pay AMT, 63% of households between $500k and $1M, and 20% of those greater than $1M (because of the higher tax bracket under the normal tax system) [source].   This data may be true in 2017, but if the proposed tax plan goes through without the State and Local Tax deduction, I suspect fewer in the $200k – $1M would be impacted by the AMT.  We wouldn’t be.  Or, if they didn’t want that “feature”, the AMT could be adjusted to have less of an impact on those in the $100k-$500k range.

And what about the really rich?  If we don’t want to call those making under $1M super rich (which it is a stupidly high limit), consider those making beyond $1M.  The tax revenue from the AMT on the 20% of those earning over $1M can’t be a small thing to throw away.  Check this out.  The tipping point is around 295k taxable income.

superwealthyamt.png

If you have an taxable income of $2M, that means you that you could have had nearly $650k of the “add-that-back-in” deductions before triggering the AMT…. yet ~20% of the people in these high income ranges are still running into the AMT!

Eliminating the AMT (while simultaneously getting rid of the deductions likely to trigger it for people in the <$1M range) has no benefit beyond serving the interest of the very wealthy.  The goal is to leave itemizing to the wealthy with their sophisticated tax situations, while giving  most of the middle class a ~$1-$2k tax cut, and give upper class property owners in high tax states a modest tax hike to help cover it.

There are other ways to achieve a goal of making sure people pay their fair share, but I’m quite sure the tax proposal has none of them.

Bonus Charts for Californians:

Considering an $8,100 personal exemption, it seems you are certain to owe the AMT if your taxable income is greater than about $245k but less than about $600k.

AMTTriggerCA

Taking it one step further, here’s how much Californians can deduct in property taxes for a given taxable income (assumes $8,100 Personal Exemption).  Note this assumes you have withheld exactly what you owed in CA state taxes, so your result will vary.  We overwitheld this year, which makes it worse.  (The lines starts to go up again around $600k.)

maxdeductble property.png

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12 Comments leave one →
  1. November 7, 2017 7:59 am

    This is a super helpful chart. Thank you for putting it together!

  2. November 7, 2017 9:19 am

    Thanks for this! Interestingly, we/I have never tried to itemize that much, though our MFJ AGI is definitely high. Last year, we itemized just under $20k. It looks like we were just under where we would have hit the AMT with our AGI and itemized deductions.

    • November 7, 2017 10:12 am

      I added a bonus chart that illustrates why Californian’s are particularly susceptible once their AGI is above about $250k.

      • November 7, 2017 11:12 am

        This is really fascinating! Thanks for putting this together!

        • November 7, 2017 11:19 am

          I find it really interesting, which is why I did it! I finally understand the AMT (or at least the gist of it), which was a hole in my knowledge. It seems like the IRS could do more to make understanding the big picture easier… I understand why they might not want to since there are lots of nuances. Someone probably benefits from the average person not really understanding it (that someone is not us).

          And they should definitely help us understand the big picture when they propose massive changes to the tax code!

          Having tax software abstract everything for us (without explanation) seems to do everyone a bit of a disservice. If you are close to the AMT but don’t hit it, i don’t think turbotax even bothers to flag this or help you understand why (although you can look at the form and figure it out). Maybe they do if you pay more…

          • November 7, 2017 11:22 am

            That’s fair and most people probably don’t red through all of the IRS forms like I do… I made my husband read them this year to double check and he was baffled by all of the math on them haha.

  3. November 8, 2017 12:36 pm

    I currently work in tax and I’m generally in favor of getting rid of the AMT, or at least drastically raising the AGI limits. The AMT wasn’t indexed for inflation for many years (until 2013) I’m mostly concerned about the 30% of people making between 200k-500k. These are mostly families and small business owners and I just don’t think the AMT was meant to impact them as much as it does. In high cost of living states that income doesn’t go as far as you think it would. 200k in New York City is different than 200k in a lower cost of living area. The AMT is just a convoluted way of raising taxes, it would make more sense to just raise the tax rates or limit deductions based on AGI.

    • November 8, 2017 7:40 pm

      I see the point about the 200-500k group. (Though even in NYC it is hard to believe they are struggling. I’m in a high cost area, I fully understand it is not the same, but I’m just not that sympathetic for $500k broke people.) Raising the exemption seems like a fine idea, although it is indeed indexed it for inflation now.

      It isn’t simply a convoluted way to raise taxes, it limits the amount of deductions in aggregate the wealthy can make to ensure everyone pays a fair share. It effectively limits deductions based on AGI, but not on a deduction-by-deduction basis. This seems completely reasonable to me. Seeing that 20% of people making over $1M manage to run into this, it seems useful. Raising the tax rates on those who aren’t taking massive deductions doesn’t seem fair either.

      I don’t work in tax and my understanding of how the AMT really works is new, so I’m clearly just stating what seems fair to me.

  4. November 11, 2017 1:02 am

    I need to read this again when it’s not midnight but we’re under $245 AGI and have triggered AMT at least a couple times. I’m trying to remember when and why but I think this calls for some research.

    • November 11, 2017 8:00 am

      That seems right – about 245k triggers it if you deductions are only state income tax and 2 personal exemptions with no other deductions.

      Assuming you’ve had property tax, mortgage interest, and possibly other things that change (selling stocks I think is handled differently?), it could be much lower.

    • November 11, 2017 12:57 pm

      I’m not sure why i keep getting confused on this, but instead of AGI, this should be taxable income (AGI – all deductions allowed under normal tax law). Part of it is because W4s you get have a box that say “taxable income”, but that is not what I mean, so I thought AGI was the number you compute taxes on. It is your final taxable income…. Gah.

    • November 17, 2017 5:49 pm

      I believe this is now fixed and the graphs are properly labeled….

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