Posted on Feb 8, 2018

Unfortunately, the Tax Cuts and Jobs Act (TCJA) retains the individual Alternative Minimum Tax (AMT). But there’s a silver lining: The AMT rules now reduce the odds that you’ll owe the AMT for 2018 through 2025. Plus, even if you’re still in the AMT zone, you’ll probably owe less AMT than you did under the old rules.

Here’s what you need to know about the new-and-improved AMT rules for 2018 through 2025.

Important note: The prior law version of the AMT still applies for your 2017 income tax return, which is due on April 17, 2018.

Why the AMT Hits Upper-Middle-Income Taxpayers

Under prior law, many high-income taxpayers weren’t affected by the AMT. That’s because, after numerous legislative changes, many of their tax breaks were already cut back or eliminated under the regular income tax rules. So, there was no need to address the AMT. For instance, the passive activity loss rules restrict the tax benefits that can be reaped from “shelter” investments like rental real estate and limited partnerships.

If your income exceeds certain levels, you run into phaseout rules that chip away or eliminate other tax breaks. As a result, higher-income taxpayers had little or nothing left to lose by the time they got to the AMT calculation, while many upper-middle-income folks still had plenty left to lose. Also, the highest earners were in the 39.6% regular federal income tax bracket under prior law, which made it less likely that the AMT — with its maximum 28% rate — would hit them.

In addition, the AMT exemption is phased out as income goes up. This amount is deducted in calculating AMT income. Under prior law, this exemption had little or no impact on individuals in the top bracket, because the exemption was completely phased out. But the exemption phaseout rule made upper-middle-income taxpayers even much more likely to owe AMT under prior law.

Under the TCJA, upper-middle-income people are somewhat less likely to owe the AMT, and if they do, their AMT liabilities are likely to be lower.

The Basics

Think of the AMT as a separate tax system that’s similar to the regular federal income tax system. The difference is that the AMT system taxes certain types of income that are tax-free under the regular tax system and disallows some regular tax deductions and credits.

The maximum AMT rate is 28%. By comparison, the maximum regular tax rate for individuals was 39.6% for 2017 under prior law. The maximum regular tax rate for individuals is reduced to 37% for 2018 through 2025 thanks to the TCJA.

For 2017, the maximum 28% AMT rate kicks in when AMT income exceeds $187,800 for married joint-filing couples and $93,900 for others. For 2018, the maximum 28% AMT rate starts when AMT income exceeds $191,500 for married joint-filing couples and $95,750 for others.

Inflation-Adjusted Exemption

Under the AMT rules, you’re allowed a relatively large inflation-adjusted AMT exemption. This amount is deducted when calculating your AMT income. The TCJA significantly increases the exemption for 2018 through 2025. The exemption is phased out when your AMT income surpasses the applicable threshold, but the TCJA greatly increases those thresholds for 2018 through 2025.

If your AMT bill for the year exceeds your regular tax bill, you must pay the  higher AMT amount. Originally, the AMT was enacted to ensure that very wealthy people didn’t avoid paying tax by taking advantage of “too many” tax breaks. Unfortunately, the AMT also hits some unintended targets. (See “Why the AMT Hits Upper-Middle-Income Taxpayers” at right.) The new AMT rules are better aligned with Congress’s original intent.

Key Figures

The following table summarizes the AMT exemptions and phaseout thresholds for 2017:

  Unmarried individuals Married couples who file jointly Married individuals who file separately
AMT exemption amount

$54,300

$84,500

$42,250

Phaseout starts at

$120,700

$160,900

$80,450

Completely phased out at

$337,900

$498,900

$249,450

The following table summarizes the AMT exemptions and phaseout thresholds for 2018:

  Unmarried individuals Married couples who file jointly Married individuals who file separately
AMT exemption amount

$70,300

$109,400

$54,700

Phaseout starts at

$500,000

$1 million

$500,000

Completely phased out at

$781,200

$1,437,600

$718,800

Under both old and new law, the exemption is reduced by 25% of the excess of AMT income over the applicable exemption amount. But under the TCJA, only those with really high incomes will see their exemptions phased out, while others (including middle-income taxpayers) will benefit from full exemptions.

Risk Factors Before and After the TCJA

So, who will be hit by the AMT? Various interacting factors come into play when evaluating whether the AMT will apply or not, but there are several common warning signs to watch for under the old and new rules.

Substantial income. High income can cause the AMT exemption to be partially or completely phased out. The TCJA significantly increases the exemptions and thresholds for 2018 through 2025, reducing or eliminating the AMT hit for most taxpayers.

Large itemized deductions for state and local income and property taxes. Under the prior law, these taxes can be fully deducted for regular federal income tax purposes, but they’re completely disallowed under the AMT rules. Under the TCJA, the regular tax deduction for state and local income and property taxes is limited to $10,000. So, this risk factor has lost most of its teeth.

Multiple personal and dependent exemption deductions. Under the prior law, these deductions are disallowed under the AMT rules. Under the new law, personal and dependent exemption deductions are eliminated. So, this risk factor is gone under the TCJA.

Exercise of “in-the-money” incentive stock options (ISOs). The so-called bargain element (the difference between the market value of the shares on the exercise date and the exercise price) doesn’t count as income under the regular tax rules, but it does count as income under the AMT rules. Unfortunately, this risk factor still exists under the new law.

Significant miscellaneous itemized deductions. Examples of these deductions include investment expenses, fees for tax advice and unreimbursed employee business expenses. Under the prior law, you can write off these deductions for regular tax purposes, but they are disallowed under the AMT rules. Under the TCJA, most miscellaneous itemized deductions are eliminated. So, this risk factor is basically gone.

Interest from “private activity bonds.” This income is tax-free for regular federal tax purposes, but it’s taxable under the AMT rules. Unfortunately, this risk factor still exists under the new law.

Significant depreciation write-offs. Individuals may deduct depreciation expense for fixed assets — such as machinery, equipment, computers, furniture and fixtures — from owning sole proprietorships or investing in S corporations, limited liability companies or partnerships. These assets must be depreciated over longer periods under the AMT rules, which increases the likelihood that you’ll owe the AMT.

Under the new law — for assets placed in service between September 28, 2017, and December 31, 2022 — businesses can deduct the entire cost of many depreciable assets in the first year under both the regular tax rules and the AMT rules. So this risk factor is diminished for newly added assets. However, it continues to exist for older assets that are subject to the depreciation schedules allowed under the prior law.

Contact a Tax Pro

Though the new law reduces the odds that you’ll owe the AMT for 2018 through 2025, don’t automatically assume you’ll be exempt. Be aware of the risk factors that still apply under the new law, because IRS auditors are specifically trained to find them. If you fail to report your AMT obligation, you’ll owe back taxes, interest, and possibly penalties.

Ask your tax advisor about your AMT exposure. If you’re at risk, some planning strategies may be available to lower your AMT profile.

Posted on Nov 7, 2017

Historic Tax Reform Compared to Today

The alternative minimum tax (AMT) arose as part of the Reagan administration’s tax reforms. In addition to simplifying capital gains rates and taxation, the top marginal tax rate dropped from 70 percent to 28 percent. The AMT and passive activity rules were put in place as a way to close “loopholes.”

Lower tax rates sound good until we note the loss of certain itemized deductions that have never returned, such as deducting credit card interest and a dependent’s student loan interest. However, marginal tax rates were raised over and over again through the 90s. Additionally, since that time, more middle class Americans who saw their incomes rise during the industrial and tech booms have been getting caught in the AMT trap.

Therefore, if additional itemized deductions and other “loopholes” are removed or curtailed, history shows that they will not come back even though the federal government still has the option to raise marginal tax rates. This could be really costly to taxpayers in the long run.

Your Tax Planning Prediction

If I were to look into my crystal ball on tax reform, I would predict that the “reform” that eventually passes will look a whole lot different than this initial framework.

My standard guidance to clients is to look at their own individual tax situation and continue to leverage opportunities that range from tax-deferred savings to keeping track of potential itemized deductions. If a major event has occurred or is on the horizon this year, talk to your CPA about its potential tax impact under the current tax code.

For companies, it is too early to tell if a change in business structure is a good move for tax purposes. We recommend that clients sit tight with their current business structure until we have more clarity on how different business structures will be taxed.

Ultimately, consider your business goals and planning for investments or equipment purchases. Consider the current equipment expensing and bonus depreciation rules, the time frame for which your company will need the equipment, and your projected profits when making the decision whether to invest this year or next. The same holds true for estate planning. Planning with the guidance of your trusted advisors keeps you and your family in more control regardless of the next version of federal tax legislation.

As soon as we see some actual legislation from the Hill, there may be more to discuss for you or your company. Think of Cornwell Jackson if you are in need of longer-range planning, reporting support or guidance. And stay tuned!

Download the whitepaper: Tax Reform 2017 – How New Tax Legislation Will Affect Businesses and Individuals

Scott Allen, CPA, joined Cornwell Jackson as a Tax Partner in 2016, bringing his expertise in the Construction and Oil and Gas industries, and 25 years of experience in the accounting field. As the Partner in Charge of the Tax practice at Cornwell Jackson, Scott provides proactive tax planning and tax compliance to all Cornwell Jackson tax clients. Contact him at Scott.Allen@cornwelljackson.com or 972-202-8032.

Posted on Nov 6, 2017

There are more interesting proposed tax changes for individuals than on the business level. The proposal calls for seven individual tax brackets to be replaced by just three, potentially 12, 25 and 35 percent.  It also calls for eliminating the so-called “marriage penalty” and expanding the standard deduction. However, some of these proposed changes could end up hurting some taxpayers more than helping them.

According to the Wolters Kluwer report, the math for some taxpayers under the proposed higher standard deduction vs. taking the current standard deduction plus personal exemptions does not seem to add up well.

“Under the inflation adjusted amounts for 2017, a family of four filing a joint return could claim a standard deduction of $12,700, plus $16,200 for four personal exemptions of $4,050. The result reduces adjusted gross income by $28,900. Under the GOP framework, the standard deduction for married filing jointly is only $24,000 with no exemptions. The result would be that the family’s taxable income would be increased by $4,900 as compared to 2017 inflation adjusted amounts.”  

The framework calls for an expansion of the child tax credit.  The amount of the credit would increase and be made available to more income groups.

The framework also proposes significant changes to itemized deductions. Nearly all the itemized deductions will be eliminated except for mortgage interest and charitable deductions. Note that property, sales, and income tax deductions are targeted for elimination.

A significant impact on our clients is the proposed concept of capping itemized deductions. President Trump had called for a cap of $100,000 in itemized deductions for single filers up to a $200,000 cap for married filing jointly. People with high out-of-pocket medical expenses (currently amounts beyond 7.5 percent of adjustable gross income), for example, would lose that option to reduce their taxable income. In addition, the opportunity for large charitable contributions and mortgage interest deductions may be impacted. There was also discussion during President Trump’s campaign that all personal exemptions and head-of-household status would be eliminated, but all of these potential deductions are expected to undergo discussion in committee.

Tax Planning Changes for Individuals

My standard guidance to clients is to look at their own individual tax situation and continue to leverage opportunities that range from tax-deferred savings to keeping track of potential itemized deductions. If a major event has occurred or is on the horizon this year, talk to your CPA about its potential tax impact under the current tax code.

Ultimately, consider your business goals and planning for investments or equipment purchases. Consider the current equipment expensing and bonus depreciation rules, the time frame for which your company will need the equipment, and your projected profits when making the decision whether to invest this year or next. The same holds true for estate planning. Planning with the guidance of your trusted advisors keeps you and your family in more control regardless of the next version of federal tax legislation.

As soon as we see some actual legislation from the Hill, there may be more to discuss for you or your company. Think of Cornwell Jackson if you are in need of longer-range planning, reporting support or guidance. And stay tuned!

Continue Reading: Today’s Reform and Tax Planning Predictions

Scott Allen, CPA, joined Cornwell Jackson as a Tax Partner in 2016, bringing his expertise in the Construction and Oil and Gas industries, and 25 years of experience in the accounting field. As the Partner in Charge of the Tax practice at Cornwell Jackson, Scott provides proactive tax planning and tax compliance to all Cornwell Jackson tax clients. Contact him at Scott.Allen@cornwelljackson.com or 972-202-8032.

Posted on Nov 1, 2017

Corporate Tax Reform

In the new tax reform bill, the framework proposes a 20 percent corporate tax rate, down from 35 percent, as well as a top rate of 25 percent for pass-through income. This change, if passed would particularly benefit small business owners and sole proprietorships, but provisions may be put in place to prevent certain service providers or wealthy business owners from converting compensation income to profits that would be taxed at a lower rate.

One proposed change that makes a lot of sense for business owners is elimination of the estate tax. For anyone who has an estate valued at more than $5.49 million (as of 2017) and wants to leave an inheritance to anyone beyond their spouse, that money is taxed at a fairly steep maximum federal rate of 40%. Fortunately for Texans, there isn’t an additional state inheritance tax, since that tax was eliminated in 2015. Because taxpayers have already paid tax on income gained over their lives, opponents consider the federal estate tax to be double taxation.

Some of the business owners particularly affected by the estate tax are ranchers and farmers, whose assets are not liquid but tied to the value of their land. It is not difficult to go beyond $5 million in estate value for several thousand acres of land. Families have been forced to sell their land to pay the tax.

There is some mention of the estate tax being replaced by a carryover basis rule as well as elimination of the generation-skipping transfer tax. This is one change that may have bipartisan support.

Business expensing

Many changes to business incentives are proposed in the tax framework, from elimination of the Domestic Production Activities Deduction (DPAD) to modernizing industry-specific tax breaks to reflect economic reality. If a maximum 20% corporate tax rate is attained, it may make sense to eliminate DPAD and any special incentives that allow only certain businesses to reduce their tax impact even further.

There will be considerable planning opportunities for changes to bonus depreciation or first-year expensing. A proposed 100 percent bonus depreciation for five years starting in 2017 may accelerate investments in property or equipment, but such investments should still make logical sense for the business. In addition, if a business elects to deduct or expense investments rather than capitalize and depreciate, this will result in reduced deductions and higher taxable income in future years. On the face, it seems like an easy analysis, but each business situation will be different.

Repatriation of Profits

Within the tax framework, businesses would be encouraged to bring profits back from foreign subsidiaries and reinvest them in U.S. assets as well as reshoring their headquarters. A one-time 10 percent tax on non-repatriated money has also been proposed. Currently, unless they are structured properly, companies with business outside the U.S. are taxed at the normal corporate tax rate. The new framework offers a reduced tax rate for U.S.-based businesses, likely intended to increase U.S. competitiveness with other countries.

Corporate Tax Planning Prediction

For companies, it is too early to tell if a change in business structure is a good move for tax purposes. We recommend that clients sit tight with their current business structure until we have more clarity on how different business structures will be taxed.

Ultimately, consider your business goals and planning for investments or equipment purchases. Consider the current equipment expensing and bonus depreciation rules, the time frame for which your company will need the equipment, and your projected profits when making the decision whether to invest this year or next. The same holds true for estate planning. Planning with the guidance of your trusted advisors keeps you and your family in more control regardless of the next version of federal tax legislation.

As soon as we see some actual legislation from the Hill, there may be more to discuss for you or your company. Think of Cornwell Jackson if you are in need of longer-range planning, reporting support or guidance. And stay tuned!

Continue Reading: Tax Reform 2017 – Changes for Individuals

Scott Allen, CPA, joined Cornwell Jackson as a Tax Partner in 2016, bringing his expertise in the Construction and Oil and Gas industries, and 25 years of experience in the accounting field. As the Partner in Charge of the Tax practice at Cornwell Jackson, Scott provides proactive tax planning and tax compliance to all Cornwell Jackson tax clients. Contact him at Scott.Allen@cornwelljackson.com or 972-202-8032.

Posted on Oct 30, 2017

Tax reform has taken many twists and turns since April. It appears that any iteration of a tax reform bill will be far from business as usual. Simplification of tax rate tiers and nearly doubling the standard deduction have an overall aim of making individual tax filing easier. However, certain provisions for eliminating deductions are a valid concern among both business owners and individuals. There are good ideas that align with historic tax reform, and others that stray far from it. The best course is to look at your own tax situation from the previous year and consider ways to improve it, while sitting tight on tax news from the Hill. It’s only a framework, so far.

What we Know So Far About the New Tax Legislation

Earlier in 2017, our tax experts at Cornwell Jackson were anticipating what to recommend to clients about a possible change in business structure to manage corporate tax impacts. Initially, both the Trump and Republican tax plans proposed a large federal corporate/business tax rate reduction, putting the new rate for C Corps at 15 or 20 percent. It was a key campaign promise, and comments made by President Trump in March regarding a tax reform package emphasized that he wants to lower the overall tax burden on businesses, regardless of business structure.

Moving into the fourth quarter, President Trump is still promising significant tax cuts and simplification of the tax code. The “United Framework for Fixing Our Broken Tax Code” calls for lower individual tax rates under a three-bracket structure, nearly doubling the standard deduction, and a significant reduction in the corporate tax rate. The framework outlines changing the tax treatment of pass-throughs, expanding child and dependent incentives, and eliminating both the alternative minimum tax and the federal estate tax.

According to a report by Wolters Kluwer, a tax reform package moving through Congress under the reconciliation rules would require only a Senate majority. Any tax cuts would likely have to sunset after 10 years. But 10 years is significant to live with any actual changes.

I will attempt to point out proposed impacts to business owners and individuals in this article, along with how such changes align with historical tax reform and what that may represent for the next decade if we see new legislation for the 2017 tax year.

To drill down to a specific area of the tax reform bill, click on a link below.

Ultimately, consider your business goals and planning for investments or equipment purchases. Consider the current equipment expensing and bonus depreciation rules, the time frame for which your company will need the equipment, and your projected profits when making the decision whether to invest this year or next. The same holds true for estate planning. Planning with the guidance of your trusted advisors keeps you and your family in more control regardless of the next version of federal tax legislation.

As soon as we see some actual legislation from the Hill, there may be more to discuss for you or your company. Think of Cornwell Jackson if you are in need of longer-range planning, reporting support or guidance. And stay tuned!

Download the whitepaper: Tax Reform 2017 – How New Tax Legislation Will Affect Businesses and Individuals

Scott Allen, CPA, joined Cornwell Jackson as a Tax Partner in 2016, bringing his expertise in the Construction and Oil and Gas industries, and 25 years of experience in the accounting field. As the Partner in Charge of the Tax practice at Cornwell Jackson, Scott provides proactive tax planning and tax compliance to all Cornwell Jackson tax clients. Contact him at Scott.Allen@cornwelljackson.com or 972-202-8032.