Don't Mess With Taxes

Before law changes, the now inflation-indexed Alternative Minimum Tax, known as the AMT, seemed to work like an ATM for the U.S. Treasury. When the AMT was created in 1969 to ensure wealthy individuals paid at least some tax, it wasn't indexed for inflation. Until that changed with the 2017 tax reform law, the AMT adversely affected a lot of less-wealthy taxpayers. (Photo by Ali Mkumbwa on Unsplash)

What's worse than figuring your tax bill? Having to figure a second, higher, parallel amount you might owe.

That's a situation that taxpayers who owe the Alternative Minimum Tax, or AMT, end up facing at filing time. But to the relief of millions, tax law changes have reduced the number of taxpayers who have to deal with the AMT.

Still, separate AMT tax system, with rates of 26 percent and 28 percent, hits some taxpayers every year. That's why filers who might be hit with the AMT also await the annual inflation adjustments to the income levels that trigger the alternative tax.

Why two taxes: The creation of the AMT made, and still makes, sense. It 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.

The AMT required they pay at least some tax.

That's still the rule, with taxpayers who potentially face the AMT doing double tax duty, computing their annual tax liability under both the regular and alternative tax methods. When the calculations are done, you pay the higher of the two tax amounts.

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 Internal Revenue Service.

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 6 of the ol' blog's annual tax inflation series, takes a look at the 2025 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 individual taxpayer earnings that will be excepted from AMT in 2025 start at:

• $88,100 for single and head-of-household taxpayers,
• $137,000 for married couples filing joint returns or surviving spouses, and
• $68,50 0 for married couples filing separately.

Exemptions start phasing out once AMT income hits $626,350 for single filers and $1,252,700 for married taxpayers who file jointly.

For this 2024 tax year, the AMT exemption amounts for individuals start at:

• $85,700 for single and head-of-household taxpayers,
• $133,300 for married couples filing joint returns or surviving spouses, and
• $66,650 for married couples filing separately.

Exemptions start phasing out once AMT income hits $609,350 for single filers and $1,218,700 for married taxpayers who file jointly.

Other AMT calculations: The minimum tax also applies to estates. For 2025, the exemption amount for these legal and financial vehicles is $30,700. It is $29,900 for the 2024 tax year.

The AMT also affects young people subject to the kiddie tax, discussed in Part 5 of this year’s inflation series.

For the 2025 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 $9,550. That "plus" amount for 2024 is $9,250.

All these AMT exemptions for both the 2024 and 2025 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 2025, 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.

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

But there's a limit on how much of your pay each year 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 October announced the wage base will go up in 2025 to $176,100. That's a nice increase from the 2024 wage base of $168,600.

Remember, this income level at which tax collection ends applies only to the Social Security portion of the payroll tax. There is no earnings cap for the Medicare portion.

Those who earn less than the wage base limit won't see any changes in paychecks. But if your six-figure income is more than $168,800 this year or $176,100 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 2025 tax year, the income threshold for domestic workers that triggers FICA coverage will increase to $2,800 for domestic employees. That's a slight bump up from the 2024 household worker income trigger of $2,700.

Yeah, I know. The AMT and nanny tax tend to be rich people's worries, like the estate and capital gains taxes in the aforementioned Part 5 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 lots of middle-income taxpayers do hire household help. It that’s you, pay attention to the tax ramifications.

And if your income situation to which these taxes and the FICA wage base apply, be prepared for those tax implications, too.

More inflation tax info on the way: With this sixth post in the annual tax inflation series, the annual 10-part series has turned the corner and is heading down the 2025 homestretch.

As the box below notes, you can find a directory in the series' first post, with links to already published inflation adjustments, as well as a preview of what's still to come.

Thanks for reading. And thanks especially for your tax inflation interest and explanation patience!

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