Guest Post by Gigi Boudreaux, CPA, MBA
The time for year-end tax planning is over and a tax season with new due dates looms. Hopefully you have accelerated deductions, because in 2016 that is perhaps more important than the previous years as President Trump’s tax proposal forecasts significant cuts to tax rates. So, what deductions can we accelerate? The Internal Revenue Code allows for only a handful of deductions for individual taxpayers, the largest of which are state and local income taxes, real estate taxes, and mortgage interest. In New York, we pay among the highest state income taxes AND some of the highest property taxes in the country. My clients would love to take advantage of these burdensome taxes and deduct them early, but the dreaded Alternative Minimum Tax (“AMT”) dashes their hopes. What the heck is the AMT anyway?!
The AMT is an antiquated tax originally enacted in 1969 to prevent tax avoidance by wealthy taxpayers. Unlike the regular income tax, the AMT parameters were not indexed for inflation. As a result, with economic growth and inflation over time, more and more middle-income taxpayers find themselves paying the AMT. What does this mean? It means that those ridiculously high New York state income AND property taxes are not deductible. That’s right – you are getting zero benefit for the largest tax deductions you pay each year.
This is how I explain the AMT to my clients: The AMT is an alternative taxing system that exists in the background to the regular taxing system. All taxpayers MUST pay the higher of the result of the two taxing systems. The regular taxing system, as we know, is a series of graduated rates (currently seven; Trump’s proposing only three) from as low as 10% to the highest of 39.6%. As your income increases, you pay a higher rate of tax. The AMT has only two rates (26% and 28%) and taxes a much broader income tax base. Both the regular tax and the AMT start in the same place by summing all sources of income. From there, the two systems differ. For regular tax, taxpayers can deduct dependency exemptions and itemized deductions, which include medical expenses, state and local income taxes, mortgage interest expense, charitable contributions, and, to a limited extent, miscellaneous deductions. For AMT, only charitable contributions and limited mortgage interest deduction are allowed. So for New York families whose largest deductions on their tax returns are personal and dependency exemptions and state and local taxes (including real estate taxes), will be paying AMT, a tax higher than their regular tax.
Here’s some good news. President Trump is proposing to eliminate the AMT. While Democrats and Republicans disagree on many of Trump’s proposals, I believe this is one that all Long Islanders can agree upon. According to tax estimates from the Tax Policy Center, last year approximately 27% of households nationwide with incomes between $200,000 and $500,000 were affected by the AMT. My estimation is that many of those households reside here in New York because those who are most vulnerable to the AMT are those taxpayers with large families (three or more children) living in high state and local tax states.
So, while experts agree that Trump’s proposed tax rate reduction will only help the wealthiest taxpayers, many New York taxpayers may see a reduction in tax if the AMT is repealed. Questions still remain on Trump’s proposal to limit itemized deductions, which may affect the tax savings on the elimination of the AMT. Other issues that may surface will be the AMT credit carryovers (the government attempt to ease the AMT burden) and the AMT interplay with net operating loss carryovers.
One thing remains certain: no one will be unhappy to see the AMT go away.
Gigi Boudreaux, CPA, MBA is a Tax Partner in Raich Ende Malter & Co. LLP’s Long Island office. She primarily serves small business clients working in the real estate, distribution, manufacturing, and construction industries. She can be reached at firstname.lastname@example.org.