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Don’t Wait Until Year End to Take the AMT Into Account in Your Tax Planning

September 30, 2014

Start planning now in order to minimize your AMT impact.

The alternative minimum tax (AMT) is a separate income tax system that reduces or prohibits certain deductions and treats some income items differently. The top AMT rate is lower than the top regular tax rate: 28% vs. 39.6%. But more of your income may be subject to the AMT rate, which can result in a larger tax bill because you must pay the higher of your AMT or regular tax liability.

Some permanent AMT relief was signed into law at the beginning of 2013, but it primarily benefits middle-income taxpayers. Many high-income taxpayers are still at significant AMT risk. To reduce this risk — or to minimize any negative impact if the AMT is unavoidable — you must start planning now.

Potential Triggers

Here are some of the deductions and income items that are treated differently for AMT purposes and can trigger the AMT:

  • State and local income and property taxes (especially if you live in an area where rates are high)
  • Interest on home equity debt of up to $100,000 not used to improve your principal residence
  • Miscellaneous itemized deductions subject to a floor (such as professional fees, investment expenses and unreimbursed employee business expenses)
  • Medical expenses for taxpayers age 65 and older (this group still enjoys a lower floor for deducting these expenses for regular tax purposes than for AMT purposes)
  • Accelerated depreciation adjustments and related gain or loss differences when assets are sold
  • Tax-exempt interest on certain private activity municipal bonds
  • Incentive stock option exercises

Large amounts of long-term capital gains and dividends can also trigger the AMT, even though they aren’t treated differently for AMT purposes.

Start Planning Now

You need to start planning for the AMT now because actions you take between now and Dec. 31 could cause you to unnecessarily trigger the AMT or to lose deductions that you could have preserved. We’ll cover some AMT planning strategies in a future blog, but if you’d like some ideas now, please contact us. We also can help you project your income and deductions for the year and assess your AMT risk.

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