House tax reform bill eliminates the dreaded AMT. Or does it?

By Leonard Smith, CPA and Tax Principal

As the GOP tax reform bill makes its way through Congress, you’ll be hard-pressed to find anyone complaining about the proposed repeal of the much-despised Alternative Minimum Tax, or AMT.

Designed originally as a parallel tax system to ensure that at least some income tax would be paid by wealthy individuals with access to substantial deductions and credits, the AMT slowly grew to ensnare a growing number of middle income taxpayers. Eliminating this parallel tax system – with its own unique set of tax calculations – would bring relief to millions, and allow lawmakers to tout the reform bill as a “yuge” benefit to the middle class.

The proposed elimination of the AMT is indeed good news on its face. But on closer reading, the bill also proposes eliminating many of the preferences and exclusions of the regular tax system that served to trigger the AMT. By removing these triggers, the net effect is not the actual elimination of the AMT; it is simply the changing of its name.

As of this writing, the deductions and credits (expressed in AMT calculations as add-backs) that are slated for elimination in the House bill include:

  • Personal exemptions – currently a “regular tax system” deduction and an AMT exclusion item (i.e., not deductible for AMT purposes), the proposed bill would repeal this deduction.
  • Deduction for state and local taxes– currently, amounts paid for state and local income and property taxes are deductible for regular tax purposes, while no amount is deductible for AMT purposes (exclusion item). Easily one of the most unpopular provisions, the proposed bill would completely eliminate the deduction for state income taxes paid, and limit the deduction for property taxes to $10,000.
  • Interest from private activity bonds – currently tax-exempt for “regular tax” purposes and an AMT exclusion item (add-back to AMT income). The proposed bill would terminate private activity bonds, thus eliminating the “regular tax”/AMT difference.
  • Medical expenses – currently, amounts in excess of 7.5% of adjusted gross income (AGI) are deductible for regular tax purposes (if over 65 years old), while amounts in excess of 10% of AGI are deductible for AMT purposes (exclusion item). The proposed legislation would eliminate any deductions for medical expenses.
  • Deduction for tax preparation fees – currently, amounts in excess of 2% of AGI are deductible for regular tax purposes, while no amount is deductible for AMT purposes (exclusion item). The proposed legislation would eliminate any deductions for tax preparation fees.

As you can see, the proposed legislation eliminates many provisions of the regular tax system as we know it, and replaces it with a “new” regular tax system that looks, feels and performs a lot like the parallel tax system known as the AMT.

All too often, complex legislation is squeezed into simple, blue-sky soundbites in order to push the agenda of our elected officials.  But upon closer inspection, the savvy sleight-of-hand in language and policy tends to be revealed.

After wading through 429 pages of proposed tax reform promises and projections, the conclusion is clear: the AMT would not be going away. It would just become the New Normal.

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Leonard Smith, CPA is Tax Principal at the business advisory and accounting firm RBF in Woburn, MA. He can be reached at (781) 321-6065, extension 136 and at lennys@rbfpc.com.

 

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