Sometimes a new law is passed and many people say, “That’s all right. That’s going to affect somebody else. Not me.”
That’s exactly what many Americans thought in 1969, when Congress passed the Alternative Minimum Tax (AMT). Then Treasury Secretary Joseph Barr told Congress that 155 taxpayers with incomes exceeding $200,000 paid no federal income tax. He proposed an alternative tax structure to help make certain these taxpayers pay a minimum amount of federal taxes.1
Fast forward to 2026, and 7 million taxpayers are expected to pay the AMT.2
Pay a Minimum
The Internal Revenue Service states the AMT applies to taxpayers with high incomes by setting a limit on those benefits. It helps to ensure that those taxpayers pay at least a minimum amount of tax.
“Is it right to pay taxes to Caesar or not?… Give to Caesar what is Caesar’s, and to God what is God’s.” Matthew 22:17, 21
The trouble was, when the AMT was passed in 1969, it was not indexed to inflation. Therefore, the number of people who pay increases every year, even if their real income does not change. Making matters worse, the 2001 and 2003 tax law changes lowered taxpayers’ liability under the regular income tax structure without changing the AMT rules, which meant that even more taxpayers had to pay a minimum amount of taxes.3
2017 Tax Law Expires
The 2017 Tax Cuts and Jobs Act addressed some of AMT issues so fewer taxpayers would be required to pay a minimum federal tax. The 2017 law raised the AMT exemption, raised the income level at which the exemption begins to phase out, and changed some other items that were taxed.
As a result, the number of AMT taxpayers fell to 200,000 in 2018, from more than 5 million in 2017.4
However, the AMT provision in the 2017 law expires in 2025, and in 2026, the number of taxpayers paying the AMT will increase.
What Can You Do?
We’re not tax experts (but we are associated with companies that are), however there are a couple of widely known approaches that you might consider if you are concerned about the AMT. However, these ideas are for informational purposes only. We encourage you to consult your tax professional for advice on your specific situation. OR, our planning department can do a TAX ANALYSIS!
Employer-sponsored plans: By making tax-deductible contributions to your retirement plan, you can manage your adjusted gross income (AGI), which may put you in a better position with the AMT.5
HSA and FSA: Health savings accounts and flexible spending accounts are funded with pre-tax contributions, which may also help you manage your AGI.5
Charity donations: Another approach that may help you manage your AGI is to boost your charitable contributions. To get the benefit, you need to consider how your charitable contribution may affect your standard deduction. Additionally, for those of you drawing a Required Minimum Distribution (RMD), consider giving it directly to your church or other charitable organization. With that approach, that amount of your RMD doesn’t even hit your tax return!!5
These three approaches are just a few ideas to consider if you are concerned about being included in the ATM in the years ahead. But before making any changes, please reach out to us. We would be happy to work with you and your tax professional to develop approaches that best fit your overall financial strategy.
- Brookings.edu, 2023
- TaxPolicyCenter.org, 2023
- CenteronBudgetandPolicyPriorities.org, 2022
- TaxPolicyCenter.org, 2023
- Investopedia.com, November 22, 2022