Northwood Family Office & Segal GCSE on Alternative Minimum Tax Changes

In recent years, taxpayers and accountants have faced numerous tax changes and additional filings, including the recent capital gains inclusion increase and new filings related to bare trusts and underused housing tax filings. One significant but less-discussed change involves the Alternative Minimum Tax (“AMT”) rules. Northwood consulted Daniel Wilson, a tax partner from Segal GCSE to understand the recent AMT changes and their impact.

What is AMT?

AMT ensures taxpayers pay a minimum amount of tax by limiting the benefits of “tax preference” items (e.g., capital gains, credits). AMT involves two calculations: the regular tax method and the alternative method, which adds back tax preference items to compute adjusted taxable income. If AMT is higher than the regular calculation, the difference is added to the tax liability. Affected taxpayers can carry AMT forward up to seven years to offset future taxes.

Changes Starting January 1, 2024:

Key changes include:

• Federal AMT rate increase from 15% to 20.5%.

• Basic exemption increased for individuals, now linked to the third-highest federal tax bracket (approx. $173,205 in 2024).

• 100% add-back of capital gains (up from 80%), and 30% add-back for capital gains from donating listed securities (up from 0%).

• Reduction of certain deductions (e.g., interest expenses and investment management fees) to 50%.

When Does AMT Arise?

Previously, AMT typically applied in rare cases involving the lifetime capital gains exemption on the sale of a business or in years of low taxable income due to losses and deductions from partnerships, tax shelters and flow through shares. However, with the 2024 changes, AMT may be triggered in many more situations, especially where there are capital gains and interest expenses and investment management fees.

Impact on Trusts

Previously, a trust that allocated all its income to beneficiaries had no AMT exposure. These trusts may now be subject to AMT due to the 50% limitation when deducting interest and investment fees. Trusts do not have a basic exemption amount for AMT like the $173,205 now available to individuals. Therefore, trusts may be paying AMT even if the numbers in the Trust tax return are relatively small.

The impact of AMT may reduce the benefit of prescribed rate loan planning, involving trusts. The cost of maintaining this type of structuring along with the new AMT burden will need to be weighed against the tax savings, and cost to wind-down the trust such as triggering capital gains.

Donation Planning and AMT

Prior to 2024, capital gains resulting from the donation of listed securities were not taxable under the regular and alternative methods. Under the new rules, 30% of these capital gains are now added to the calculation of adjusted taxable income for AMT purposes. In addition, only 80% of donation tax credits can be used to reduce any AMT payable. Therefore, it’s possible for taxpayers to be caught under the new AMT rules if they make very large donations of public company shares. Each situation needs to be carefully looked at to determine if AMT will apply.

Conclusion

With the new AMT rules now in effect in 2024, traditional tax planning strategies, particularly involving trusts and donations, may require reassessment. The new rules are complex, so taxpayers and their advisors should carefully evaluate each situation to ensure the potential impact of AMT is fully understood and managed.

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