Alternative Minimum Tax

Many of my clients ask about the Alternative Minimum tax. As if the regular federal income tax rules aren’t complicated enough, you also may have to cope with a shadow tax system called the alternative minimum tax (AMT). Although it was originally designed to exact a minimum amount of tax from taxpayers who take advantage of complex tax shelters and big-yield deductions, the AMT has evolved to the point where it reaches mainstream taxpayers.

Here’s how the AMT works in a nutshell. You begin with taxable income as computed for purposes of the regular federal income tax. Then you add back to taxable income many of the important deductions you claimed to arrive at regular taxable income. For example, state and local income and real property taxes, miscellaneous itemized deductions, and personal exemptions all may need to be added back. Depending on the types of businesses and investments you’re involved in, there could be other adjustments as well. For example, certain tax breaks for incentive stock options aren’t allowed for AMT purposes.

What should you do about the AMT? The first step is to estimate whether or not you will have an AMT problem at tax return time. Then, if you may have AMT exposure, the key to lessening the damage often is timing. In particular, a mid-year and year-end analysis is useful. Most important of all, every major business and investment decision you’re contemplating should be taken with the AMT in mind. The tax advantages you may be counting on to make a deal work may not be quite as robust as you expected because of the AMT.

To partially alleviate this tax burden, Congress has been enacting annual “patches” to the AMT to increase exemption amounts. The patch gives taxpayers higher exemption amounts and other relief. The American Taxpayer Relief Act of 2012 (2012 Taxpayer Relief Act) provides immediate relief for the AMT by permanently increasing the AMT exemption amounts retroactive to the 2012 tax year. Beginning in 2013, these base AMT exemption amounts will be adjusted annually for inflation. For 2012, the exemption amounts are increased to $78,750 for married couples filing jointly and surviving spouses, $50,600 for single taxpayers and heads of households, and $39,375 for married individuals filing separately.

The AMT exemption amounts are phased out at certain income levels. Because the phase-out calculation is affected by the amount of the exemption, an increase in the exemption also increases the maximum amount of alternative minimum taxable income (AMTI) a person can have before the exemption is phased out. Although the exemption amounts have increased, the threshold levels for calculating the phase-out remain unchanged in 2012. However, beginning in 2013 the threshold levels will also be inflation-adjusted. For 2012, the AMT exemption amounts are completely phased out when AMTI reaches $465,000 for married couples filing jointly and surviving spouses, $314,900 for single taxpayers and heads of households, and $232,500 for married individuals filing separately. Additionally, the nonrefundable personal tax credits offset rule is made permanent after 2011by the 2012 Taxpayer Relief Act. Therefore, these credits can be offset against regular tax and AMT liability, after reduction for any foreign tax credit.

With more certainty on the AMT horizon, tax planning strategies can be used to reduce its impact. As a general rule, taxpayers subject to the AMT should accelerate income into AMT years and postpone deductions into non-AMT years. We believe that a thorough analysis of your current and projected tax situation could minimize or eliminate your exposure to AMT liability. Although this tax is complex we can help you navigate this incidious tax with a review of your tax scenario. Contact us for a tax check up.