Welcome to Part 7 of the ol' blog's series on 2018 inflation adjustments.
Today we look at changes to the Alternative Minimum Tax exemption amounts
and next year's Social Security wage base.
You can find links to all 2018 inflation posts in the first item:
Income Tax Brackets and Rates.
Note: The 2018 figures apply to 2018 tax returns that are due in 2019.
For comparison purposes, you'll also find 2017 amounts to be used
in filing 2017 tax returns due next April.
When you're hit by the AMT, or Alternative Minimum Tax, you might be tempted to rearrange the tax acronym's letters since it can seem like this potentially costly parallel tax is an ATM direct from your bank account to the Internal Revenue Service.
AMT's "rich" history: The AMT was born in 1969 when it was discovered that a few rich taxpayers — and we're talking really few, only 155 people, who back then made more than $200,000 — avoided paying any tax.
The AMT, with its two tax rates of 26 percent and 28 percent, kicks in at certain income levels.
In addition to possibly making the affected filers pay higher tax rates, they have to calculate their tax bill twice.
Once they do the math under the regular tax system and then under AMT rules, which disallow several popular tax breaks, such as state and local tax deduction and dependent exemptions, AMT taxpayers pay the higher amount of those two calculations.
AMT's expanded tax trouble: In its original form, AMT earnings levels were not indexed for inflation. That meant that over the decades, as people made more money, more people ended up paying the AMT.
Congress finally corrected that in 2013 as part of the American Taxpayer Relief Act, which established inflation indexing of AMT exemption amounts.
There's been talk for years on Capitol Hill about doing away with the AMT. Representatives and Senators say they'll try to do just that in the Republican tax reform bill that's still under development.
AMT annual inflation bumps: Until that happens, the best that taxpayers who face the alternative tax can hope for is that the inflation adjusted exemption amounts are high enough to keep them from falling into the AMT's clutches.
For 2018, the inflation-adjusted AMT exemption amounts start at:
- $55,400 for single and head of household taxpayers,
- $86,200 for married couples filing joint returns/surviving spouses, and
- $43,100 for married couples filing separately.
For tax year 2018, the 28 percent AMT rate applies to all taxpayers regardless of filing status with taxable incomes of more than $191,500 (except for married couples filing separate returns, who face AMT's top rate at half that amount).
You won't have to worry about those amounts above until you file your 2018 return in 2019.
For your 2017 tax return due next year, the AMT exemption amounts are:
- $54,300 for single and head of household taxpayers,
- $84,500 for married couples filing joint returns/surviving spouses, and
- $42,250 for married couples filing separately.
You can see if you owe AMT by using the worksheet found in both Form 1040 and 1040A instructions.
I know, no one uses paper and pencil anymore. In that case can use the IRS' online AMT assistant tool, which is basically an electronic version of the paper worksheet.
Or you can let your tax software, which most of us use, or your tax professional do the calculations for you.
Paying now for future federal benefits: Income levels also come into play when it comes to collecting taxes for the Social Security system.
Every worker is painfully aware of the taxes under the Federal Insurance Contributions Act or FICA as it often appears on pay stubs. This is the 6.2 percent of earnings that workers pay via withholding taxes toward Social Security.
Another 1.45 percent of wages also comes out paycheck to cover Medicare.
More earnings, more Social Security taxes: The Social Security tax portion is tied to the annual wage base.
Technically, this amount isn't indexed for inflation. Instead, each year the Social Security Administration (SSA) uses a specific formula to set the maximum taxable earnings level when a cost-of-living adjustment is effective so that Social Security benefits can keep pace with, you guessed it, inflation.
This year, the SSA was forced to recalculate the wage base amount after receiving corrected W-2s a couple of weeks after it made its original 2018 wage base announcement.
For 2018, the SSA hiked the wage base limit to $128,700 $128,400. That's less that what some economic analysts had projected, which is why we always have to wait for the official word from Uncle Sam.
That increase means that in 2018 you could pay a maximum of $7,979.40 $7,960.80 if you earn at least the maximum wage base amount. That tax figure comes from 6.20 percent X $128,700 $128,400.
In 2017, the wage base is $127,200. That means the maximum FICA tax could be $7,886.40 (again, 6.20 percent X this time $127,200).
Every year, if you make more than the base limit, that extra earnings amount is Social Security tax-free.
Employers match their employees' tax amounts, meaning the total Social Security tax is 12.4 percent and the Medicare tax total is 2.9 percent. The final computation means that Social Security and Medicate payments from you and your boss come to 15.3 percent of your earnings.
No limit, more tax on Medicare: The Medicare tax, however, doesn't have a wage base limit. Every cent you earn, regardless of how much, is subject to this tax.
And higher earners could pay even more into Medicare.
The Affordable Care Act, aka Obamacare, assesses a 0.9 percent additional Medicare tax on employees who earn more than $200,000 as single taxpayers or $250,000 if married filing jointly. This Medicare surtax is not matched by employers, but is paid only by the affected workers.
The bottom line is that all of us pay FICA taxes on some of our income. With the hike in the Social Security wage base, most of us pay FICA on all of our income. And a few folks will pay more Medicare taxes on more of their income.