The Tax Cuts and Jobs Act of 2017 (TCJA) made significant changes to the individual alternative minimum tax (AMT). As a result, the number of taxpayers who paid the AMT plunged from 5 million in 2017 to only 200,000 in 2018.

But many TCJA provisions, including those related to the individual AMT, are scheduled to expire after 2025 absent congressional action. If the AMT provisions are allowed to expire, an estimated 7.6 million taxpayers will be again subject to the tax in 2026.

AMT Basics

The AMT is similar to the regular federal income tax but includes fewer exemptions, deductions and rates. Taxpayers who file individual income tax returns must calculate the tax owed under each system and pay the larger amount. Importantly, the AMT system includes some income that’s excluded for income tax purposes, such as interest from private-activity municipal bonds and exercise of incentive stock options (ISOs). It also disallows certain deductions, such as the state and local taxes (SALT) deduction.

Generally, your AMT liability is calculated by adding nearly two dozen “preference and adjustment items” to your taxable income. Then the applicable AMT exemption is deducted to arrive at your AMT taxable income. The exemption phases out at higher income levels. The AMT rate is either 26% or 28%, depending on your AMT taxable income.

Having an AMT liability is not necessarily a bad thing, it is merely an alternate calculation of your federal income tax. Typically, your “regular” tax rate is higher but allows for more deductions. The AMT uses a lower tax rate but allows fewer deductions and income exclusions. Taxpayers should be aware of both since the regular and AMT calculations are performed concurrently.

TCJA Changes

The TCJA significantly reduced the number of individual taxpayers who are subject to the AMT by:

• Raising the AMT exemption (for 2024, the exemption is $85,700 for single filers and $133,300 for married filing jointly),
• Raising the income levels for the exemption’s phaseout (for 2024, the phaseout begins at $609,350 for individuals and $1,218,700 for married filing jointly), and
• Eliminating or reducing certain adjustment items, including miscellaneous itemized deductions exceeding 2% of adjusted gross income, personal exemptions and the home equity loan interest deduction. These deductions were no longer an adjustment to AMT as the TCJA disallowed these deductions for purposes of regular tax as well.

In addition, the TCJA imposed a $10,000 limit on the SALT deduction, which has implications for AMT liability. That limit is also currently slated to expire after 2025.

Potential Impacts of Expiring Provisions

The AMT puzzle has many moving pieces. First, if the TCJA’s individual AMT provisions are allowed to expire, the exemption and phaseout thresholds would drop, expanding the pool of potentially liable taxpayers.

However, other TCJA provisions that affect the AMT calculation are also set to expire. Some provisions, if allowed to expire, would increase AMT taxable income, while others would reduce it. Examples include:

Miscellaneous itemized deductions. If miscellaneous itemized expense deductions are restored and the standard deduction returns to its pre-TCJA levels, more taxpayers may itemize their deductions. This, in turn, could increase those taxpayers’ AMT taxable income, as certain itemized deductions are added back when calculating AMT taxable income.

SALT deduction. If the SALT deduction limit expires, some people who itemize may be allowed to claim a higher SALT deduction, thereby reducing their regular taxable income. This might cause their AMT liability to exceed their regular tax liability because the SALT deduction isn’t allowed for AMT purposes. Note: While President-Elect Trump generally supports extending the expiring TCJA provisions, he recently vowed to end (or at least raise) the SALT limit.

Pease limitation on itemized deductions. The so-called Pease limitation phases out itemized deductions at higher income levels, reducing the amount of itemized deductions a high-income taxpayer can claim by as much as 80%. If this provision expires in 2026, fewer high-income taxpayers might be exposed to the AMT because the amount of itemized deductions that must be added back when calculating AMT taxable income would be limited.

Personal exemptions. The reinstatement of personal exemptions in 2026 would generally reduce regular taxable incomes for households with dependents. Personal exemptions would be added to AMT income. but such exemptions phase out at higher incomes, so the amount that high-income taxpayers would have to add would be limited.

Be Prepared

When Republicans take control of both the White House and Congress in January 2025, they’re expected to introduce legislation to extend most of the expiring TCJA provisions. However, nothing is certain. Your AMT may stay steady or increase after 2025. Contact us to stay atop any development and develop strategies to limit your AMT exposure.