Eight ways to avoid the AMT
Posted December 29, 2011 by thomas
My colleagues at the Alliance of Cambridge Advisors (ACA) are a smart bunch! Earlier this week we had a great discussion about Alternative Minimum Tax (AMT) and the implications for said tax for millions of middle-class Americans. Below is an excerpt of a very recent ACA blog post highlighting some of the issues/difficulties around planning for AMT.
As the election season heats up, we’re hearing about the presidential candidates’ plans for the economy and taxes. I’m all in favor of revamping the tax code to make it simpler and more straightforward to understand, especially when it comes to reforming the out-of-date Alternative Minimum Tax (AMT) system. If you haven’t had the pleasure of meeting the AMT, it is a parallel tax system instituted in 1969 when it was discovered that 155 people with adjusted gross incomes greater than $200,000 paid no federal income tax on their 1967 income. According to a May 2001 report by the Joint Economic Committee, the ensuing outrage prompted more letters of complaint to Congress than the Vietnam War. In response, Congress enacted a minimum income tax, the precursor to the AMT. One could argue that the real purpose of the AMT was to diffuse the outcry about some not paying their fair share. Sound familiar? But because the AMT was never permanently indexed for inflation, when combined with effect of the 2001 and 2003 tax cuts, more and more taxpayers who were never originally targeted have been caught up in the calculation and millions of Americans now pay AMT. Each year in recent years, Congress has passed a patch to index AMT for inflation to
keep an additional 16 million taxpayers from being subject to AMT.
It is hard to know exactly who will be snagged by the AMT, but the likelihood is increased if any of these apply: your gross income exceeds $100,000, you have several children, significant itemized deductions, large capital gains, you own a business, or receive incentive stock options. I have seen a definite increase in the returns that must at least run through the calculation, as well as those that are subject to the tax. Fall is a good time to do a “sneak preview” of your taxes and head off any surprises with good tax planning.
Here are eight ways to avoid AMT
1. Don’t prepay state income and property tax in years you are subject to the AMT.
2. If your employer reimburses business expenses, such as mileage, make sure you have an “accountable” plan to keep them off your return.
3. Consider not claiming exemptions for college-age children. The AMT disallows personal exemptions, so there’s no extra tax to pay by giving them up. Letting children claim their exemptions can save income tax and possibly qualify for tuition credits that may be lost.
4. Avoid private activity municipal bonds, and consider using AMT-free mutual funds where they make investment sense for you.
5. Defer exercising Incentive Stock Options where it makes investment sense.
6. Capitalize, rather than deduct, investment expense.
7. Schedule business equipment purchases when you can use your full depreciation deductions.
8. Defer recognizing capital gains as they increase taxable income subject to the AMT.
You can read the full post here – it is worth a read.