The federal Alternative Minimum Tax (AMT) is designed to ensure that individuals and trusts pay a minimum amount of tax, regardless of deductions, exemptions, and tax credits they may be eligible for under regular income tax rules. Introduced in 1986, the AMT helps to prevent high-income earners from significantly reducing their tax liabilities through preferential treatments.
Recent Changes to AMT Rules
1. Broadening the AMT Base
Capital Gains Inclusion Rate: The inclusion rate for capital gains under AMT has increased from 80% to 100%. Conversely, the inclusion rate for capital loss carryforwards and allowable business investment losses has decreased from 80% to 50%.
Employee Stock Options: 100% of the benefit from employee stock options will now be included in the AMT calculation, while previously, it was taxed at a reduced rate of 50%.
Publicly Listed Securities Donations: 30% of capital gains from donations of publicly listed securities will now be included for AMT purposes, whereas under regular rules, these gains were not taxed at all.
Disallowance of Certain Deductions: AMT will disallow 50% of various deductions, including:
Interest and financing expenses related to earning property income
Deduction for limited partnership losses from previous years
Non-capital loss carryovers
Employment expenses (except for commission income)
Moving and childcare expenses
Non-refundable Tax Credits: Only 50% of non-refundable tax credits will be allowed to reduce AMT, with the exception of a tax credit for donations, which will be allowed at 80% of the regular amount.
2. Raising the AMT Exemption
Previously set at $40,000, the AMT exemption is now aligned with the start of the fourth federal tax bracket, which is $173,205 for 2024.
This exemption will be indexed to inflation annually.
Starting in 2024, graduated rate estates will be exempt from minimum tax, while most personal trusts will still face the minimum tax without the benefit of the exemption.
3. Increasing the AMT Rate
The AMT rate will increase from 15% to 20.5%, impacting how much tax individuals and trusts will owe under the AMT structure.
Conclusion
These changes to the federal AMT aim to ensure that individuals and trusts contribute a fair minimum amount of tax, while simultaneously adjusting the tax landscape for higher earners. Contact us for more information on how this can affect you!