The Tax Cuts and Jobs Act (TCJA) made major changes to the alternative minimum tax (AMT) regime. Businesses may see immediate savings or may be able to take new tax planning steps previously constrained by the impact of AMT.

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“Alternative Minimum Tax Repeal – Planning Options for Businesses and Individuals” by Ann Miller, CPA | Manager – Tax  Ann Miller head shot

The Tax Cuts and Jobs Act (TCJA) made major changes to the alternative minimum tax (AMT) regime. Businesses may see immediate savings or may be able to take new tax planning steps previously constrained by the impact of AMT.

What is Alternative Minimum Tax?

The AMT was designed to compel a minimum effective tax rate for corporations or individuals by limiting certain deductions and other tax benefit items. The taxpayer would prepare two tax calculations – regular and alternative. If AMT exceeded the regular tax liability for the year, the taxpayer was on the hook to pay for the AMT. An estimated 5.25 million tax filers owed AMT under the old law.

Corporate Relief

The TCJA repeals the AMT for C corporations for tax years beginning after December 31, 2017. An immediate benefit of new AMT rules for certain corporations is the ability to deduct their minimum tax credit carryforward against regular tax liability. Minimum tax credit carryforward is a credit available for corporations that paid AMT in prior years. Under old tax law, the corporation could only use this carryforward to offset future AMT. Some corporations were unable to use the credit under those conditions and continued to carryforward the credit for many years. These corporations will be able to use the credit to offset their regular tax liability in tax years 2018 to 2021.  Subject to certain limitations, it will be treated as a refundable credit.

The repeal may also facilitate some tax planning techniques that were avoided in the past due to AMT concerns. For example, under the old law, buy/sell agreements between business partners may have mandated the partners hold life insurance policies personally to fund the sale in the event of death. The agreement would be based on trust that the other partner would fund and maintain coverage. The life insurance policy could not be held by the corporation as beneficiary because the proceeds would be taxable for corporate AMT. The repeal of corporate AMT has now unlocked the opportunity to use corporate entity as beneficiary simplifying the insurance coverage provision of the buy/sell agreement.

The Tax Cuts and Jobs Act (TCJA) made major changes to the alternative minimum tax (AMT) regime. Businesses may see immediate savings or may be able to take new tax planning steps previously constrained by the impact of AMT.

Individual Relief

The TCJA does not repeal the AMT for individuals, but it does make it less likely to occur over the next few years. The new law increases the income exemption amount and increases the income levels at which the exemption is phased out. The new exemption levels start in the 2018 tax year, but will revert to the prior exemption amounts in 2026 adjusted for inflation.

AMT Exemption  Old Law New Law
Married filing joint and surviving spouse $86,200 $109,400
Unmarried individuals $55,400 $70,300
Marrieds filing separately $43,100 $54,700

 

Initial AMT Phaseout Threshold Old Law  New Law
Married filing joint and surviving spouse $164,100 $1,000,000
Unmarried individuals $123,100 $500,000
Marrieds filing separately $82,050 $500,000

In addition, changes to itemized deductions and personal exemptions should reduce the number of individuals impacted by AMT. It is projected that only about 200,000 tax filers will be subject to owe AMT in 2018 down 96% compared to the old law.

Action items

Business owners can take action now to benefit from the new AMT tax rules:

  • Review your current buy/sell agreements to determine whether a change in the life insurance strategy is appropriate
  • Review 2018 projected estimated tax payments to ensure they consider lower AMT. If the estimates were calculated based on standard safe harbor rules, you may end up overpaying tax estimates during the year. It’s better to keep that extra money in your pocket rather than sitting with the IRS.

The information contained in this article is current through the published date and may change when regulations and other guidance are issued. Content has been vetted by Apple Growth Partners’ internal tax reform team of licensed CPAs. For more information about this content, or any other matters related to tax reform, please contact your Apple Growth Partners advisor.