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AMT, payroll, and nanny tax inflation changes for 2023

ATM in a graffiti covered wall_pexels-erik-mclean-6016962-1
Before law changes, the now inflation-indexed Alternative Minimum Tax, known as the AMT, seemed to work like an ATM for the Internal Revenue Service, allowing it to collect this parallel tax from more than the wealthy for whom it was created. (Photo by Erik Mclean)

Calculating one tax bill is bad enough, but some people have to deal with a second one at tax filing time.

The Alternative Minimum Tax, or AMT, is a separate tax system created to ensure that the wealthiest pay at least some tax. The parallel AMT was added to the Internal Revenue Code in 1969 when lawmakers discovered that a few rich taxpayers — and we're really talking few, specifically 155 people who back then made more than $200,000 — avoided paying any tax. It required they pay at least some tax.

That's still the rule, with AMT rates of 26 percent and 28 percent. Sounds simple enough, right? But taxpayers who potentially face the AMT must do double tax duty, computing their annual tax liability under both the regular and alternative tax methods.

No indexing at the beginning: In its original form, the AMT worked well. In fact, too well.

Since it was not indexed for inflation, as earnings and tax breaks not allowed under the AMT grew, a lot of decidedly not-rich taxpayers ended up paying the alternative tax. For these unintended tax targets, the AMT effectively was a tax ATM for the IRS.

Congress finally changed the law in 2013 to index the AMT for inflation. The key here is the amount of income that's not subject to the AMT. If you fall under this exclusion cap, you don't have to worry about doing double the tax work on Tax Day.

The AMT became even less burdensome for more taxpayers with the enactment of the Tax Cuts and Jobs Act (TCJA) of 2017. This tax reform measure increased the base AMT income exemption amount that's subject to inflation bumps, as well as hiked the threshold at which that exemption phases out.

Another TCJA change also lessened the AMT impact.

The parallel tax requires taxpayers who itemize to add back some Schedule A claims before they figure their alternative tax amount. But since the TCJA greatly increased standard deduction amounts, fewer taxpayers than ever are itemizing, and therefore no longer have to worry about the AMT add-backs.

This post, Part 7 of the ol' blog's annual tax inflation series, takes a look at the 2023 AMT inflation adjustments, along with some other payroll issues that are tweaked each year if the cost-of-living warrants.

AMT's automatic inflation adjustment: You don't have to worry about the AMT at all if your income is in what is known as the exclusion range.

The amount of earnings that will be excepted from AMT in 2023 start at:

  • $81,300 for single and head of household taxpayers,
  • $126,500 for married couples filing joint returns or surviving spouses, and
  • $63,250 for married couples filing separately.

Exemptions start phasing out once AMT income hits $578,150 for single filers and $1,156,300 for married taxpayers who file jointly.

For this 2022 tax year, the AMT exemption amounts start at:

  • $75,900 for single and head of household taxpayers,
  • $118,100 for married couples filing joint returns or surviving spouses, and
  • $59,050 for married couples filing separately.

Exemptions start phasing out once AMT income hits $539,900 for single filers and $1,079,800 for married taxpayers who file jointly.

Other AMT calculations: The minimum tax also applies to estates. For 2023, the exemption amount for these legal and financial vehicles is $28,400. It is $26,500 for the 2022 tax year.

The AMT also affects young people subject to the kiddie tax, discussed in yesterday's Part 6.

For the 2023 tax year, a child to whom the kiddie tax applies has an AMT exemption that's the child's annual amount of earned income — that's wage or salary money, not the investment income to which the kiddie tax applies — plus $8,800. That "plus" amount for 2022 is $8,200.

All these AMT exemptions for both 2022 and 2023 tax years should save plenty of filers from the hassle of doing two separate tax computations.

Payroll taxable amount going up, too: As the AMT issue shows, earning more money does have some drawbacks. Still, I've never met anyone who's turned down a raise.

If you do get a pay hike in 2023, good for you! And here's another annual tax adjustment amount you'll need to note.

As we all learned as soon as we got our first paychecks, Uncle Sam gets a cut. The payroll tax, authorized by the Federal Insurance Contributions Act, or FICA as it often appears on pay stubs, comes out of our regular pay to help fund the Social Security and Medicare programs.

For the Social Security portion, it's 6.2 percent of our income. This tax also is collected as the self-employment tax that must be calculated and paid via Schedule SE by folks who are their own bosses.

Each year there's a limit on how much of your pay that is subject to the Social Security tax. This amount, known as the wage base, is determined by the Social Security Administration (SSA).

The SSA earlier this month announced the wage base will go up next year to $160,200. That's a nice increase from the 2022 limit of $147,000. You can read more about the wage base change and taxes in my earlier post Social Security wage base is $160,200 in 2023, meaning more FICA taxes for higher earners.

This income level applies only to the Social Security portion of the payroll tax. There is no earnings cap for the Medicare portion.

For those of us who earn less than the wage base limit, we won't see any changes in our paychecks. But if your six-figure income is more than $147,000 this year or $160,200 next year, you'll see more in each paycheck issued after your earnings exceed the Social Security wage base.

Nanny tax changes, too: In addition to adjusting the wage base that's subject to the Social Security tax, the SSA also reviews the payment thresholds that trigger coverage for household workers.

The requirement that individuals who hire household staff is popularly known as the nanny tax. However, the tax applies doesn't just apply to a modern-day Mary Poppins. It covers all household, aka domestic, workers.

The folks who hire a child-care worker, housekeeper, or others to help with the upkeep and running of their homes must let the IRS know about that staff. When one of those workers earns more than a certain amount, that employer must pay their portion of the worker's Social Security tax. Remember, FICA taxes require employees and their bosses to equally split payment of these taxes.

For the 2023 tax year, the income threshold for domestic workers that triggers FICA coverage will increase to $2,600 for domestic employees. That's a slight bump up from the 2022 household worker income trigger of $2,400.

Yeah, I know. The AMT and nanny tax tend to be rich people's worries, like the estate and capital gains taxes in Part 6 of this series. Most of the ol' blog's readers (including me!) won't have to mess with AMT math this or next year.

But you never know. Your (and my!) income situation to which these taxes and the FICA wage base apply could greatly improve in the future.

When that happens, be ready to deal with the associated taxes.

More inflation tax info on the way: With this seventh tax inflation post, the annual 10-part series has turned the corner and is heading down the 2023 homestretch.

Two parts are on their way in the next few days. The final one, mileage rate changes, usually is issued closer to the end of the year.

You can see the prior six inflation posts, as well as some related items that went up earlier, in the directory at the end of this year's first inflation post

Thanks for reading this one and all the rest. And thanks especially for your tax inflation interest and explanation patience.

This post on inflation changes in 2023 to the alternative, nanny, and payroll taxes
Part 7 of the ol' blog's annual series on myriad tax inflation adjustments. 
The 10-part series started with a look at next year's
income tax brackets and rates.
That first item also has a directory, at the end of the post,
of all of the posted and upcoming tax-related inflation updates for 2023.
Note: The 2023 figures in this post apply to that tax year's returns to be filed in 2024.
For comparison purposes, you'll also find 2022 amounts that apply
to this year's 2022 taxes that will be due April 18, 2023.







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