The Alternative Minimum Tax (AMT) is a taxpayer’s nightmare. The AMT was created in 1969 to ensure that the super-rich couldn't avoid taxes through various tax shelters. Its burden, however, is being felt by many more taxpayers principally because the AMT tax rates haven’t changed, while the regular tax brackets, personal exemptions and standard deduction amounts have been modified annually for inflation.
Under the AMT you will be taxed at either a 26% or 28% rate, but the real sting is that it is an "add on" to your regular income tax. Is there any way to lessen your AMT? As with all tax planning, the answer generally is yes. But it doesn't do it by itself. What you need to do is to figure out now whether you will be subject to the AMT in 2009, which will leave you enough time to plan to at least lessen its blow.
In general, if you will be subject to the AMT, your strategy is to accelerate income and defer deductions. This is the exact opposite of the regular tax strategy of accelerating deductions and postponing income, so you really do need to have some idea in advance of your AMT situation.
One way to avoid the bite of the AMT is to delay the payment of state taxes. If you are in the AMT this year but will not be next year, this can amount to a significant AMT savings. Be cautious about penalties for late payment of taxes, however, but even if you incur a small penalty it may be more than offset by the AMT savings you might have achieved.
If you have any plans to move in the near future, whether it be due to job relocation or retirement or for any other reason, moving to a state with a lower tax burden can make a significant difference in your AMT. Residents of states like New York, California or Ohio, for example, which have high state and local tax rates, claim many of their residents as AMT payers.
A few other tips:
- When you pay your state taxes, if you can determine whether you will fall into the AMT, your aim should be to match your state tax deduction with a high-income year.
- Instead of going for a big capital gain, try to calculate the AMT you would owe and take smaller amounts of gains over several years. Of course, your core investment decisions should always take priority over your tax planning - we don't want to have the "tax-planning tail wagging the dog."
- If you have Incentive Stock Options (ISOs), for AMT purposes it is better to exercise them gradually, and with care. If you exercise too many ISOs in one year it is almost guaranteed that you will pay significantly more AMT than if you had exercised them over a period of years.
These types of strategies will help you minimize your Alternate Minimum Tax burden for the current year, but you also need to make sure they also make sense for the longer term. AMTIndividual.com gives you customized strategies to soften the blow of AMT and easy-to-use planning tools for making tax-savvy decisions to reduce your AMT throughout the year.
