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The Alternative Minimum Tax (AMT)

January 24, 2019

When it comes to federal income tax, there are fewsubjects capable of causing as much confusion as theAMT. The Tax Cuts and Jobs Act substantiallyincreased the AMT exemptions and exemptionphaseout thresholds for 2018 to 2025. Here's a quickguide to understanding the AMT.

What is the AMT?The AMT is essentially a separate federal income taxsystem with its own tax rates, and its own set of rulesgoverning the recognition and timing of income andexpenses. If you're subject to the AMT, you have tocalculate your taxes twice — once under the regular taxsystem and again under the AMT system. If yourincome tax liability under the AMT is greater than yourliability under the regular tax system, the difference isreported as an additional tax on your federal incometax return. If you're subject to the AMT in one year,you may be entitled to a credit that can be appliedagainst regular tax liability in future years.

How do you know if you're subject tothe AMT?Part of the problem with the AMT is that, withoutdoing some calculations, there's no easy way todetermine whether or not you're subject to the tax.Key AMT "triggers" have included the number ofpersonal exemptions you claim (no longer applicablefrom 2018 to 2025), your miscellaneous itemizeddeductions (no longer applicable from 2018 to 2025),and your state and local tax deductions. So, forexample, if you have a large family and live in ahigh-tax state, there's a good possibility you mighthave to contend with the AMT. IRS Form 1040instructions include a worksheet that may help youdetermine whether you're subject to the AMT (anelectronic version of this worksheet is also availableon the IRS website), but you might need to completeIRS Form 6251 to know for sure.

Common AMT adjustmentsIt's no easy task to calculate the AMT, in part becauseof the number and seemingly disparate nature of theadjustments that need to be made. Here are some ofthe more common AMT adjustments:

• Standard deduction and personal exemptions: Thefederal standard deduction, generally availableunder the regular tax system if you don't itemizedeductions, is not allowed for purposes ofcalculating the AMT. Nor could you take adeduction for personal exemptions for purposes ofcalculating the AMT when personal exemptionswere still available under the regular tax system in2017.

• Itemized deductions: Under the AMT calculation,no deduction is allowed for state and local taxespaid, or for certain miscellaneous itemizeddeductions. In 2018 to 2025, those miscellaneousitemized deductions are not allowed under theregular tax system as well. You can only deductqualifying residence interest (e.g., mortgage orhome equity loan interest) to the extent the loanproceeds are used to purchase, construct, orimprove a principal residence. In 2018 to 2025,this is also the rule under the regular tax system.

• Exercise of incentive stock options (ISOs): Underthe regular tax system, tax is generally deferreduntil you sell the acquired stock. But for AMTpurposes, when you exercise an ISO, income isgenerally recognized to the extent that the fairmarket value of the acquired shares exceeds theoption price. This means that a significant ISOexercise in a year can trigger AMT liability. If ISOsare exercised and sold in the same year, however,no AMT adjustment is needed, since any incomewould be recognized for regular tax purposes aswell.

TIP: If you owe AMT, youmay be able to loweryour total tax (regular taxplus AMT) by claimingitemized deductions onForm 1040, even if yourtotal itemized deductionsare less than thestandard deduction. Thisis because the standarddeduction is not allowedfor the AMT and, if youclaim the standarddeduction on Form 1040,you cannot claimitemized deductions forthe AMT.

Source: 2017 Instructionsfor Form 6251,Alternative Minimum TaxIndividuals

Page 1 of 2, see disclaimer on final page

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2019

Securities and advisory services offered through Commonwealth Financial Network member www.FINRA.org/www.SIPC.org , a RegisteredInvestment Adviser. Fixed insurance products and services offered through CES Insurance Agency. This material has been provided for generalinformational purposes only and does not constitute either tax or legal advice. Investors should consult a tax or legal professional regarding theirindividual situations.

• Depreciation: If you're depreciating assets (forexample, if you're a sole proprietor and own anasset for business use), you'll have to calculatedepreciation twice — once under regular income taxrules and once under AMT rules.

AMT exemption amountsWhile the AMT takes away personal exemptions (nolonger applicable from 2018 to 2025) and a number ofdeductions, it provides specific AMT exemptions. Theamount of AMT exemption that you're entitled todepends on your filing status.

Your exemption amount, however, begins to phaseout once your taxable income exceeds a certainthreshold. (Specifically, your exemption amount isreduced by $0.25 for every $1.00 you have in taxableincome over the threshold amount).

AMT Exemption Amounts by Filing Status

2018 2019

Married filingjointly

$109,400 $111,700

Single or headof household

$70.300 $71,700

Married filingseparately

$54,700 $55,850

AMT Exemption Phaseout Threshold

2018 2019

Married filingjointly

$1,000,000 $1,020,600

Single or headof household

$500,000 $510,300

Married filingseparately

$500,000 $510,300

Technical Note: In the context of AMT exemptionamounts and tax rates, taxable income really refers toyour alternative minimum taxable income (AMTI).Your AMTI is your regular taxable income increasedor decreased by AMT preferences and adjustments.

Technical Note: When it comes to the phaseout ofAMT exemption amounts, a special calculationapplies to individuals who are married filing a

separate federal income tax return. These individualshave to add an additional amount to their AMTI beforecalculating the exemption phaseout.AMT ratesUnder the AMT, the first $194,800 (for 2019,$191,100 for 2018) of your taxable income is taxed ata rate of 26%. If your filing status is married filingseparately, the 26% rate applies to your first $97,400(for 2019, $95,550 for 2018) in taxable income.Taxable income above this amount is taxed at a flatrate of 28%.

The lower maximum tax rates that generally apply tolong-term capital gain and qualifying dividends applyto the AMT calculation as well. So, even under AMTrules, a maximum rate of 20%, 15%, or 0%(depending on your taxable income) generally appliesfor 2018 and 2019. However, long-term capital gainand qualifying dividends are included when youdetermine your taxable income under the AMTsystem. That means large capital gains and qualifyingdividends can push you into the phaseout range forAMT exemptions, and can indirectly increase AMTexposure.

Summing upOwing AMT isn't the end of the world, but it can be avery unpleasant surprise. It also turns a number oftraditional tax planning strategies (e.g., acceleratingdeductions) on their heads, so it's a good idea tofactor in the AMT before the end of the year, whilethere's still time to plan.

If you think you might be subject to the AMT, it maybe worth sitting down to discuss your situation with atax professional.

The Tax Cuts and JobsAct, signed into law inDecember 2017,substantially increasesthe AMT exemptions andexemption phaseoutthresholds from 2018 to2025 (with inflationadjustments after 2018).After 2025, the amountsrevert to their pre-2018levels and aresubstantially reduced.

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