The alternative minimum tax (AMT) represents a policy compromise among tax systems of deductions, credits and exclusions popular with the public and a tax base of comprehensive economic income enthusiastically envisioned by tax theorists. The last 30 years of stymied tax reform efforts demonstrate that the demand for a tax regime with dramatically reduced preferences and lower rates is soft despite decades of clamor for a fair, simple system.
The recently enacted Tax Cuts and Jobs Act of 2017 made a few appropriate simplifications. One of the most sought after and well received involves the AMT. The Wall Street Journal estimates the number of AMT filers will be reduced from 5 million to 200,000.1 That’s a coverage more consistent with the original policy goal of the AMT imposing some minimum tax on those with substantial economic income. In 1967, there were 155 taxpayers with income of $200,000 paying no federal income taxes. That income would be approximately $1.49 million in 2018 dollars.2
Dramatically increased exemptions from the AMT, coupled with a diminished risk of the AMT exemption being phased out, account for the removal of many prior AMT payers. The nearly 30 percent increase in the AMT exemptions for both married filing jointly taxpayers ($84,500 to $109,400) and single or head-of-household taxpayers ($54,300 to $70,300) provides appropriate relief for taxpayers who never should have been entangled in the AMT. For all but those with the highest incomes, the full benefit of exemption will be preserved. For single and head-of-household filers, alternative minimum taxable income (AMTI) up to $500,000 ($1 million for married filing jointly) still enjoys an unreduced exemption. Only when AMTI exceeds $781,200 for single or head-of-household filers ($1,437,600 for married filing jointly) is the AMT exemption phased out completely. The AMT exemption will also be annually adjusted for inflation.
Additionally, two of the most likely triggers of the AMT in 2017 and earlier years have either been temporarily suspended (miscellaneous itemized deductions subject to the 2 percent of AGI floor) or dramatically capped as with the $10,000 limitation on state and local taxes.
The Impact on Giving
What do the AMT reforms mean for charitable giving? Since the AMT won’t be governing all but the highest of the highest income taxpayers, charitable givers will be seeing their taxes reduced by the rates from regular tax, not the lower rates of the AMT. The after-tax cost of charitable giving should be less, especially in wake of the suspension of the limitation of certain itemized deductions. The donor response to these changes presently is unknown, especially from the most generous, whom I describe as the tithers. Should their cost of giving increase, the predictions of a decline in charitable contributions are likely to be seen.
In “Impact of AMT Reform on Giving,” p. 8, I introduced three different tithers representing donors of middle income ($100,000), upper middle income ($500,000) and upper income ($1 million). I estimated their tax liabilities under the new law at constant levels of income and charitable contributions. The tax results suggest, at best, the cost of giving declines for the middle income tithers and remains either neutral or modestly negative for the upper middle income and upper income tithers. But, in all three scenarios, their savings from giving benefited from the higher marginal rates under the regular tax.
Era of Relative Predictability
The evisceration of the AMT means the charitably inclined will see savings based on the higher marginal rates under the regular tax. The largest risks of triggering an AMT rate will include private activity bond income, exercising incentive stock options and a substantial percentage of income from preferentially taxed capital gains. For those contemplating the largest gift of their lifetime, the time may well be right.
1. Laura Sanders and Richard Rubin, The Wall Street Journal Guide to the New World of Taxes (2018), at p. 13.