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Alternative Minimum Tax exemption amounts, Social Security wage base increase in 2019


Welcome to Part 7 of the ol' blog's 2019 series on tax inflation adjustments. 
Today we look at changes to the Alternative Minimum Tax (AMT)
and next year's Social Security wage base.
You can find links to all 2019 inflation posts
in the 
series' first item: income tax brackets and rates.
Note: The 2019 figures apply to 2019 returns that are due in April 2020.
For comparison purposes, you'll also find 2018 amounts to be used
in filing this year's 2018 tax return due April 15, 2019.

ATM machine_getting cash
Taxpayers who face the alternative minimum tax, or AMT, see it as the tax system's ATM to their bank accounts. The good news is that recent tax law changes and inflation adjustments have eased this parallel tax bite.

Being dyslexic is dangerous when it comes to taxes. A transposed number can increase or decrease your tax bill. And either way, the error will get the added attention of the Internal Revenue Service when it double checks your filings against supporting or third-party documents.

But rearranging letters is understandable with it comes to the tax acronym AMT.

That initial abbreviation stands for Alternative Minimum Tax, a parallel tax system created back in the late 1960s to ensure that rich people had to pay, as the name says, a minimum amount of tax.

Over the years as inflation helped bump up individuals' earnings, AMT exemption upticks didn't automatically follow, meaning more taxpayers were hit by this separate tax calculation.

In these cases, the AMT seemed to be Uncle Sam's personal ATM tied directly to your bank account.

AMT's "rich" history: Rather than being a cash cow for the U.S. Treasury, federal lawmakers originally saw the AMT as a way to introduce at least a modicum of tax equity into the system.

This separate tax was created in 1969 after it was revealed that a few rich taxpayers — and we're talking really few, specifically only 155 people who back then made more than $200,000 — avoided paying any tax.

The AMT's two tax rates of 26 percent and 28 percent were designed to fix that by kicking in at certain income levels.

In addition to possibly making the affected filers pay higher tax rates, the AMT, especially pre-tax software calculation tools, added insult to tax injury by making affected filers calculate their tax bill twice, once under the regular system and again under AMT.

Once that tax math is done, AMT taxpayers pay the higher amount of those two calculations.

AMT inflation now automatic: As more middle-class families fell into AMT clutches over the years, Congress took care of the no-indexing issue by manually making annual changes to the amount of earnings that are exempt from the parallel tax.

Capitol Hill finally made the inflation adjustment automatic in 2013 and now fewer folks face the AMT each year.

For 2019, the AMT exemption amounts, affected both by TCJA increases and inflation adjustments, start at:

  • $71,700 for single and head of household taxpayers,
  • $111,700 for married couples filing joint returns or surviving spouses, and
  • $55,850 for married couples filing separately.

The tax reform and inflation changes mean that the more than five million filers who owed AMT according to the most recent IRS data should drop, per Congress' Joint Committee on Taxation and Tax Policy Center calculations, to somewhere between 200,000 and 500,000.

Remember, too, that the above amounts apply to tax year 2019, whose tax returns are due in 2020.

For 2018 taxes due next April, the AMT exemption amounts aren't as generous. They start at:

  • $70,300 single and head of household taxpayers,
  • $109,400 for married couples filing joint returns/surviving spouses, and
  • $54,700 for married couples filing separately.

Still, every bit helps when it comes to avoiding the AMT. And filers get more help here in 2019.

More earnings, more Social Security taxes: 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

The Social Security tax portion is tied to the annual wage base.

Social-security-card-cash

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.

The SSA earlier this fall announced the 2019 wage base limit. It was bumped up to $132,900.

That increase means that in 2019 you could pay a maximum of $8,239.80 if you earn at least the maximum wage base amount. That tax figure comes from 6.20 percent X $132,900.

As for the 2018 tax year, the current wage base is $128,400. That means the maximum Social Security payroll tax that could be collected through this Dec. 31 is $7,960.80. Again, this result comes from 6.20 percent X (this time) $128,400.

Keep these amounts in mind as you work on your speech to convince your boss to give you a nice holiday bonus this year or bump up next year's pay to (or more than) 2019's wage base amount.

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Comments

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Kay Bell

Thanks, Juan, for catching my error. Bad cut and past on my part from an earlier document. Also thanks for the elaboration on TCJA changes that could affect the AMT. And, of course, thanks for reading! Kay

Juan C Gil

Dear Kay:

According to the IRS, the correct AMT exemption for 2018 for married couples filling jointly is $109,400 (up from $84,500 in 2017) and to $70.300 for individual filers (up from $54,300 in 2017). Source:https://www.irs.gov/pub/irs-prior/f6251--2018.pdf

There are two other notable changes to the AMT that may significantly impact the number of taxpayers who paid the higher AMT in 2017:

First, in addition to the higher exemption amount, many more tax filers will benefit from the full amount of the AMT exemption. The phaseout amounts have been increased to $1 million for joint filers (up from $160.9K in 2017) and to $500K for individual filers (up from $120.7K in 2017). Source: https://www.irs.gov/pub/irs-prior/f6251--2018.pdf

Second, some of the key deductions not allowed under the AMT calculation are now also not allowed under the regular tax calculation. For example, the personal exemptions and the $10K limit on the deduction of SALT.

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