Avoiding AMT
Avoiding AMT
More and more taxpayers are finding a hidden tax on their individual tax returns. The alternative minimum tax (AMT) attempts to ensure that high income individuals who benefit from the tax advantages of certain deductions and exemptions will pay at least a minimum amount of tax. This tax was originally designed to keep taxpayers in higher income brackets from unduly taking advantage of tax-driven policies by using:
- A lot of miscellaneous itemized deductions
- High local and state tax deductions
- Child exemptions
- A mortgage deduction
- Incentive stock options
The AMT has a different tax computation that adds back most deductions and compares the total with a specified exemption amount, creating a tax liability for an individual who would otherwise have paid little or no tax.
AMT Exemption Amounts (2014)
AMT exemption | |
MFJ or QW | $82,100 |
Single or HOH | 52,800 |
MFS | 41,050 |
Exemption reduced by 25% of AMTI over: | |
MFJ or QW | $156,500 |
Single or HOH | 117,300 |
MFS | 78,250 |
Exemption eliminated at AMTI of: | |
MFJ or QW | $484,900 |
Single or HOH | 328,500 |
MFS | 242,450 |
The following tax planning strategies should be reviewed to help individuals counter the AMT and plan successfully for their financial future:
- Acceleration of Ordinary Income. Individuals who expect to owe should consider accelerating ordinary and short-term capital gain income and not deferring into the next year. Possible deductions to defer include state and local income taxes, real estate taxes, and miscellaneous itemized deductions subject to the two percent floor, which are not deductible under the AMT system. This planning technique is contrary to typical advice, but it may lower the ultimate tax bill.
- Acceleration of Expenses. Individuals who are not subject to the AMT in 2014, but who will be in 2015, should accelerate expenses that are not deductible for AMT purposes into 2014. Also, they should consider selling private activity bonds and or paying off home equity debt if the interest expense is not deductible for AMT purposes.
- Blend Tax Rates between years. Some of the differences between the AMT and regular tax systems are merely matters of the timing when deductions are taken. For instance, the AMT generally requires slower depreciation than is permitted for regular tax purposes. Other differences are permanent; for example, state income taxes can never be deducted under the AMT system, while under the regular system, they are deductible when paid. Paying AMT in one year may generate a credit against a future year’s regular tax, particularly when adjustments are due to timing differences. Overall, an individual may be better off if AMT is paid in a previous year in order to gain a credit in a later year. Perform a multi-year analysis to anticipate the effect of planning techniques used in 2014 on future years.
- Stock Option Exercises. Consider whether any exercised incentive stock options should be disqualified (a disqualified disposition) before year-end to minimize the AMT liability, especially if the stock has dropped in value. If you have incentive stock options, you may also realize AMT tax credits. If you have exercised incentive stock options and then suffered a subsequent drop in stock price, there is a new law that applies to AMT credit carryovers that may bring you some tax relief.
- Beware of the AMT Traps. Watch out for other AMT traps, such as income from private activity (municipal) bonds, which is taxable under the AMT. In addition, certain mortgage interest, such as from a home equity loan, is subject to AMT if the funds from the loan are not used to buy, build, or substantially improve a primary or second home.
- Utilizing Lower Capital Gain Rates. Taking advantage of lower capital gains rates can produce AMT implications in several situations, so be careful to consider the overall tax situation before taking any action. For example, the bargain element associated with the exercise of an incentive stock option is subject to AMT. Similarly, any large capital gain may raise your state and local taxes to a level that would trigger AMT. The resulting AMT could wipe out some or all of the benefit expected from the lower capital gains rate. This makes it particularly important to plan on a multiyear basis for transactions that could trigger the AMT.
- Perform an AMT self-diagnosis. Falling victim to the AMT has many possible causes, but individuals may be particularly prone to AMT if any of the following issues exist: – Large state and local tax deductions – Large long-term capital gains – Large deductions for accelerated depreciation – Large miscellaneous itemized deductions – Mineral investments generating percentage depletion and intangible drilling costs – Research and development expenses – An exercise of incentive stock options – Tax-exempt income from private activity bonds.
If one or more of these conditions affects you, you should discuss your AMT situation with your tax adviser, as soon as possible. Planning now will help net savings today, and it will best position individuals for the future.
We hope you found this article about “Avoiding AMT” helpful. If you have questions or need expert tax or family office advice that’s refreshingly objective (we never sell investments), please contact us or visit our Family office page or our website at www.GROCO.com. Unfortunately, we no longer give advice to other tax professionals gratis.
To receive our free newsletter, contact us here.
Subscribe to our YouTube Channel for more updates.
Alan Olsen, is the Host of the American Dreams Show and the Managing Partner of GROCO.com. GROCO is a premier family office and tax advisory firm located in the San Francisco Bay area serving clients all over the world.
Alan L. Olsen, CPA, Wikipedia Bio
GROCO.com is a proud sponsor of The American Dreams Show.
The American Dreams show was the brainchild of Alan Olsen, CPA, MBA. It was originally created to fill a specific need; often inexperienced entrepreneurs lacked basic information about raising capital and how to successfully start a business.
Alan sincerely wanted to respond to the many requests from aspiring entrepreneurs asking for the information and introductions they needed. But he had to find a way to help in which his venture capital clients and friends would not mind.
The American Dreams show became the solution, first as a radio show and now with YouTube videos as well. Always respectful of interview guest’s time, he’s able to give access to individuals information and inspiration previously inaccessible to the first-time entrepreneurs who need it most.
They can listen to venture capitalists and successful business people explain first-hand, how they got to where they are, how to start a company, how to overcome challenges, how they see the future evolving, opportunities, work-life balance and so much more..
American Dreams discusses many topics from some of the world’s most successful individuals about their secrets to life’s success. Topics from guest have included:
Creating purpose in life / Building a foundation for their life / Solving problems / Finding fulfillment through philanthropy and service / Becoming self-reliant / Enhancing effective leadership / Balancing family and work…
MyPaths.com (Also sponsored by GROCO) provides free access to content and world-class entrepreneurs, influencers and thought leaders’ personal success stories. To help you find your path in life to true, sustainable success & happiness. It’s mission statement:
In an increasingly complex and difficult world, we hope to help you find your personal path in life and build a strong foundation by learning how others found success and happiness. True and sustainable success and happiness are different for each one of us but possible, often despite significant challenges.
Our mission at MyPaths.com is to provide resources and firsthand accounts of how others found their paths in life, so you can do the same.
Unveiling Entrepreneurial Success with Randi Brill
Randi Brill, best-selling author and CCO of Just Call Randi Design Agency discusses unveiling entrepreneurial success on Alan Olsen‘s American Dreams Show. Transcript: Alan Olsen Hi, this is Alan Olsen and welcome to American Dreams. My guest today is Randy brill. Ready welcome to today’s show. Randi Brill Thank you, Alan. I’m glad to be here. …
Legacy Builders Philanthropic Revolution
Legacy Builders Conference Inspires Philanthropic Revolution The recent “Legacy Builders” event has sparked a philanthropic revolution, inspiring attendees to leverage their accumulated wealth for world betterment. The event, held on May 15, 2024, in San Jose, CA, featured distinguished speakers including NFL legend and HGGC Partner Steve Young¹, retired three-star General Michael Barbero², and Becky…
Rob Ryan’s Amazing Movie Premiere June 28th on How He Saved the Internet
The Hollywood movie premiere of the Rob Ryan story is a cinematic tribute to innovation. This remarkable film documents the real-life journey of this visionary from crisis to triumph and how he saved the internet! On June 28th at 9:30 PM in the iconic TCL Chinese Theatre. For tickets, click here. Rob Ryan, Founder…