Alternative Minimum Tax: Who Still Pays?

Summary

WSJ Your Money Briefing: Alternative Minimum Tax – Who Still Pays?

Date: May 21, 2018
Host: J.R. Whalen
Guest: Laura Saunders, WSJ Tax Reporter

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Episode Overview

In this episode, host J.R. Whalen interviews Wall Street Journal tax reporter Laura Saunders to break down the recent changes to the Alternative Minimum Tax (AMT) under the new tax law. They explore how the AMT has become significantly less impactful for most taxpayers, what kinds of filers it still affects, and discuss future implications if Congress does not take further action.

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Key Discussion Points & Insights

1. The Shrinking Scope of the AMT

• Background: The AMT, sometimes called the "rich person's tax," was originally established in 1969 to ensure high-income earners could not avoid paying taxes through excessive deductions.
• Current State: Due to changes in tax law, notably by the most recent Congress, far fewer people now pay the AMT.
  • Quote: "Congress scaled it way back. They had vowed to—The Republicans in Congress had vowed to repeal it. They didn't do that, but they scaled it back so that it is a shadow of its former self. It's not out, but it's way, way down." —Laura Saunders (01:48)
• Who Still Pays: Previously, the tax often hit individuals earning between $200,000 and $500,000, but that has dropped sharply.

2. Dramatic Reduction in Affected Taxpayers

• Old vs. New Numbers:
  • Before: About 5 million filers were projected to pay AMT in 2018.
  • After Tax Law: Only about 200,000 filers now pay the AMT.
  • Quote: "For 2018, it was going to be about 5 million filers. And under the new system, it's only about 200,000 filers. That is a huge drop." —Laura Saunders (02:50)
• Reason: Reduced ability to claim state/local tax deductions, personal exemptions, and miscellaneous deductions were historically major triggers for AMT but have now been eliminated or curtailed.

3. How the AMT Works

• “It's basically a parallel tax system. You have to figure your taxes two ways and pay whichever's the most. The AMT takes away the value of a lot of tax breaks that you get under the regular tax if you're taking too many breaks." —Laura Saunders (03:10)
• Triggers such as state/local taxes, personal exemptions, and unreimbursed employee expenses are now minimized under the law.

4. AMT Credits and Rare Triggers

• AMT Credits: Some taxpayers collected AMT credits due to “postponed” benefits, not lost ones (e.g., net operating loss carryforwards, depreciation).
  • Quote: "If it's some arcane things like net operating loss carryforwards or depreciation, the benefits are postponed, those turn into credits. Now you can only use them if you get off the AMT, and people never did. But now that they're getting off, they'll be able to use these credits." —Laura Saunders (04:17)
• Who Still Gets Hit: The AMT now mostly affects cases involving "esoteric" triggers, such as certain municipal bond interest, net operating loss carryforwards, or incentive stock options, rather than more common deductions.

5. Future of the AMT: 2026 and Beyond

• The current, scaled-back AMT provisions are set to expire at the end of 2025.
  • Quote: "This is one of the provisions that's... a good provision, but the problem is it expires at the end of 2025. So in 2026, the old AMT comes roaring back. Unless Congress..." —Laura Saunders (05:24)
• Implication: Without congressional intervention, the AMT could return to its previous state by 2026, possibly impacting millions of taxpayers once again.

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Notable Quotes & Memorable Moments

• On the AMT’s Origins and Shrinkage:
  "It began as a rich person's tax in 1969. It only affected people with about $1.5 million in income in today's dollars. But over time...it wound up affecting a lot of affluent people, even below that."
  —Laura Saunders (01:48)

• On AMT Credits:
  "But now that they're getting off of it, they'll be able to use these credits."
  —Laura Saunders (04:17)

• On the Potential Return of the Old AMT:
  "So in 2026, the old AMT comes roaring back. Unless Congress..."
  —Laura Saunders (05:24)

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Segment Timestamps

• 01:48 – Laura Saunders explains AMT history and its shrinking relevance
• 02:50 – The dramatic decrease in the number of AMT-affected taxpayers
• 03:10 – Why state/local tax changes reduce AMT vulnerability
• 04:17 – How AMT credits work and who can use them now
• 04:53 – Esoteric triggers and the remaining cases for AMT
• 05:24 – Warning: the temporary nature of AMT relief under current law

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Key Takeaways

• The Alternative Minimum Tax now affects a fraction of taxpayers compared to prior years due to changes in deduction rules and expanded exemptions.
• AMT’s biggest triggers—the state/local tax deduction and miscellaneous deductions—are now mostly gone, rendering the AMT far less impactful.
• Some filers may benefit from AMT credits if they are no longer subject to the tax.
• The current reprieve is temporary and unless Congress renews the current law, the AMT could be reinstated in full as soon as 2026.
• Taxpayers, especially those in higher brackets or with unusual deductions or investments, should remain vigilant about potential future changes.

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This episode offers clear, practical explanations for current and future taxpayers about who faces the AMT now, why that number has dropped, and what to watch for as 2026 approaches.

Transcript

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[J.R. Whalen]

money in market stories from the Wall street journal. I'm J.R. whalen in New York. The alternative minimum tax, also known as the amt, has been significantly reduced under the new tax law. But who still faces paying taxes under the much maligned rule? We'll discuss in a moment. First, these money headlines. More signs will be paying more at the pump in the coming months. The oil industry is showing jitters ahead of an expected return of US Sanctions on Iran, which could reduce the amount of oil in the global marketplace. And while the price of oil is currently hovering around $70 per barrel, some oil investors are suggesting a jump to $100 a barrel is not far fetched. And the Florida estate of NBA superstar Shaquille O' Neal is going on the market for $28 million. Enormous and highly customized home includes the Shack center fitness facility that features a 6,000 square foot basketball court and the Shakapulco outdoor swimming complex. Also, there are two garages which combined fit about 17 cars. This is your money briefing from the Wall Street Journal. Welcome back, everybody. Many taxpayers cringe when they hear about the alternative minimum tax, or amt. But there's a good news, bad news scenario and Wall Street Journal tax reporter Laura Saunders is here to spell it out for us. So, Laura, the AMT is known unofficially as the rich person's tax. But the good news here, as you say in your story, is it's a shell of its former self. A lot less taxpayers are impacted by it.

[Laura Saunders]

It's often called the dreaded AMT because it's complex. It's surprising. It seem out of nowhere and it began as a rich person's tax in 1969. It only affected people with about $1.5 million in income in today's dollars. But over time, as happens with the things in the tax cut, it wasn't indexed and it changed and it wound up affecting a lot of affluent people, people making $200,000 or even below that and falling mainly on people making between $200,000 to $500,000. Now, the good news and it' now is that Congress scaled it way back. They had vowed to the Republicans in Congress had vowed to repeal it. They didn't do that, but they scaled it back so that it is a shadow of its former self. It's not out, but it's way, way down.

[J.R. Whalen]

So there was A point where, under the current rules, or I should say before the Congress got involved, that millions of people were affected by the amt, and that number is far lower now.

[Laura Saunders]

Yes, it was for 2018. It was going to be about 5 million filers. And under the new system, it's only about 200,000 filers. That is a huge drop.

[J.R. Whalen]

It definitely is. And the reduction of the amount of state and local taxes that can be deducted also helps to lessen the chance that taxpayers would be hit by the amt.

[Laura Saunders]

Well, it's. Yes, how it works is so complicated, we can barely even talk about it. But it is basically a parallel tax system. You have to figure your taxes two ways and pay whichever's most, you know, the most. And the AMT takes away the value of a lot of tax breaks that you get under the regular tax if you're taking too many breaks. So that's sort of this weird, contorted logic. And the big things that used to trigger the AMT were taking state and local taxes, personal exemptions, everybody got those. And miscellaneous deductions, like for unreimbursed employee expenses and things like that, meals, entertainment. Now those are all gone or reduced. So that's one of the things really helps fewer people be subject to it. And they also expanded an exemption. So if you're making between $200,000 and $500,000, only 120,000 people will be paying that tax, versus about 4 million last year.

[J.R. Whalen]

You also write about some taxpayers that can accumulate AMT credits. How does that work?

[Laura Saunders]

It's a crazy tax, but it used to be that. See, the breaks that are taken away by the AMT fall into two buckets. One is things like state taxes. You never get those back. But if it's some arcane things like net operating loss, carryforwards, or depreciation, the benefits are postponed, those turn into credits. Now you can only use them if you get off the amt, and people never did. But now that they're getting off of it, they'll be able to use these credits.

[J.R. Whalen]

So there is some bad news here. And so there are things that would push people back into AMT territory.

[Laura Saunders]

Yes. The bad news, though, comes with good news, which is that most of the things that push people onto the AMT are much less common. They're much more esoteric. Having interest from certain kinds of municipal bonds or net operating loss, carryforwards or incentive stock options. That is not like the old triggers that were things like state and local taxes.

[J.R. Whalen]

And while the reach of the AMT has been reduced. It could return to its original evil self if Congress doesn't get involved eight years from now.

[Laura Saunders]

Well, that's it. You know, there were lots of tricks that got this tax bill through Congress and timing tricks. And this is one of the provisions that's generally I think people think it's a good provision, but the problem is it expires at the end of 2025. So in 2026, the old AMT comes roaring back. Unless Congress.

[J.R. Whalen]

Well, that'd be a good year to write a letter to your congressperson. That's Wall Street Journal tax reporter Laura Saunders joining us here in our studio. Laura, thanks for being with us.

[Laura Saunders]

And thank you.

[J.R. Whalen]

And that's your money briefing. I'm JR Whalen in New York for the Wall Street Journal.

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