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Timing Strategies to Help Avoid or Reduce AMT

October 16, 2014

Correct timing might help you take advantage of a lower maximum tax rate.

Updated: November 17, 2015

One of the common tax issues facing many high-income taxpayers is the alternative minimum tax (AMT). (See "Don't wait until year end to take the AMT into account in your tax planning" for some basics on how the AMT works and a list of common triggers.) Fortunately, you can take steps now that may allow you to avoid the AMT, or at least reduce your AMT liability. You might even be able to use its lower maximum rate (28% vs. 39.6%) to your tax advantage.

1. The first step is to total your income and deductible expenses year-to-date and project what they’ll be through the end of the year.
2. Next, you need to see whether you have any expense or income items that might trigger the AMT. You also need to consider what your AMT risk is for next year.

You then may be able to implement tax-saving timing strategies based on whether:

You’re at AMT risk. For many taxpayers, what happens in the last few months of the year can make the difference between avoiding the AMT and being subject to it. To avoid the AMT, you’ll need to avoid AMT triggers (like property taxes and miscellaneous itemized deductions subject to the 2% floor) between now and Dec. 31.

You likely will be subject to the AMT. If the AMT appears inevitable, you’ll want to focus on preserving deductions. This means deferring to next year both expenses you can’t deduct for AMT purposes (because you’ll otherwise lose their benefit) and expenses you can deduct for AMT purposes (because they’ll be less valuable in the current year). You also may want to take advantage of the AMT’s lower rate by accelerating ordinary income (such as exercising vested non-qualified stock options).

You aren’t at AMT risk this year but you may be next year. In this case you’ll want to accelerate deductible expenses and defer ordinary income, for the same reasons noted above.

One of the biggest AMT triggers that we haven’t gone into here is incentive stock option exercises, which we cover in this related blog. Please contact us if you’d like more information on the AMT and the strategies we’ve discussed.

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