hi this is Alan Olsen managing partner Greenstein Rogoff Olsen and Company also known as Groco.
Today I’d like to talk about avoiding the AMT trap. What is AMT? AMT stands for alternative minimum tax this is a tax that was designed to help keep individual tax payers in the higher income brackets from taking advantage of all the tax driven policies that Congress passes such as excess miscellaneous deductions hi local and state tax deductions child exemptions mortgage deductions in a set of stock options the AMT tax effectively does not allow individual tax payers to take their effective tax rate below a certain level so the individuals have these types of deductions they find that they’re suddenly faced with the inability to take deductions to further reduce their tax liability so the question comes up what can I do to avoid the AMT tax let’s take a look at the ways that you can help to lower your alternative minimum tax.
If you fall into this situation the following tax planning strategies should be reviewed to help individuals counter the AMT and plan successfully for their financial future number one accelerate ordinary income individuals who Oh should consider accelerating ordinary and short-term capital gain income and not defer into the next year possible deductions to the first state and local income taxes real estate taxes and missing Lea’s itemize deductions subject to the 2 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
the second you should look at is that of accelerating your expenses individuals who are not subject to AMT in 2011 but who will be in 2012 should accelerate expenses that are not deductible for AMT purposes into 2011 also they should consider selling private activity bonds or paying off home equity debt if the interest expense is not deductible for AMT purposes number three blend tax rates between years some of the differences between the AMT and regular tax systems are merely matters of timing when deductions are taken for instance the AMT generally requires slower depreciation then is permitted for regular tax purposes other differences are permanent for example state income tax can never be deducted under the AMT system
under the regular system they are deductible when paid paying AMT in one year may generate a credit against the future years 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 credit in a later year perform a multi-year analysis to anticipate the effect of planning techniques used in 2011 on future years number four stock option exercises consider whether any exercise incentive stock option should be disqualified in other words if you exercise in a set of stock option in the month of January and that stock falls in value you should really consider disposing of that stock prior to December 31st of the same year and eliminating entirely the incentive stock option preference that would be taxed for alternative minimum tax purposes but not regular tax purposes
if you have incentive stock options and feel that it may be putting you into alternative minimum tax you may also consider seeking a qualified tax professional to assist you in this planning technique number five beware of the AMT traps watch out for other AMT traps such as income from private activity bonds which is taxable under AMT in certain mortgage interest will also be taxable at amt if it’s from a home equity loan that is subject to the AMT if the funds are not used to buy build or substantially improve at primary or secondary home number six utilize lower capital gain rates taking advantage of lower capital gain rates can produce an 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 instead of stock options is subject to AMT similarly any large capital gain may raise your state and local tax to level it would trigger AMT the resulting AMT could wipe out some or all the benefit expected from the lower capital gain tax rate this makes it particularly important to plan on a multi-year basis for transactions that could trigger the alternative minimum tax number seven 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 gains large deductions for accelerated depreciation large miscellaneous itemized deductions mineral investments generating percentage depletion and intangible drilling costs research and development expenses and exercising a set of stock options tax exempt income for private activity bonds consider all of these items to whether or not they are impacting your ability to pay tax in the AMT
Category number eight claimed unused minimum tax credits there’s a provision allowing minimum tax credits to be claimed even if the taxpayer continues to pay AMT rather than regular tax preventing the claiming of these credits taxpayers with unused minimum tax credits attributable years before 2004 may get part or all of these credits refunded subject to the income phase-outs if you have large and used minimum tax credits seek a professional tax adviser to help you assess the best way to handle your unused minimum tax credits