Avoiding the Hated AMT

The alternative minimum tax (AMT) was designed to catch high-income tax dodgers, but that doesn't mean it won't snag you.

Sidestepping the AMT takes some education–it's confusing–but get a handle on it now. You've only got a few weeks to develop an exit strategy.

The AMT tax brackets are not indexed for inflation like the regular income structure, so more middle-income taxpayers are ensnared every year, especially those with many children who live in high-tax states.

The AMT is expected to affect roughly 3.6 million taxpayers this year, bringing in $23.9 billion to the U.S. Treasury. Only 120,000 of them are millionaires, the original target of the AMT when it started in 1969. By contrast, 2.9 million taxpayers earn between $100,000 and $500,000, according to the Sacramento Bee.

“There are so many moving parts it's difficult to plan for and once you are in it, it's difficult to get out of it," Bill Fleming, a tax director at PricewaterhouseCoopers (PwC) in Hartford, Conn., told the Baltimore Sun.

Whichever method produces the higher tax bill is the one you will pay. Here are some actions to take now, according to Reuters:

  • Get a basic understanding of the AMT. The definition of income under the AMT is broad. It does not allow some traditional write-offs, such as state and local tax deductions, some home equity interest, etc. It bars personal exemptions, which is why big families are hurt. To figure the tax, an AMT exemption amount is subtracted, and then the income left is subjected to tax rates of 26 percent on the first $175,000 ($87,500 for married couples filing separately) and 28 percent on the excess.

  • Check your exposure. The IRS "AMT Assistant" will help you determine whether you may be subject to the AMT. Generally, you may have to pay the AMT if you have a large number of personal exemptions, a large sum of state and local taxes (California taxpayers beware), itemized deductions, deductible medical expenses, stock options and large capital gains. One of the biggest pitfalls with the AMT is that the tax applies to gains on options that have been exercised, even if the acquired stock hasn't been sold, BusinessWeek reported.

  • Think backward, according to Lonnie Davis, director of tax services for CBIZ Accounting, Tax & Advisory Services in Plymouth Meeting, Penn. If you believe you will have to pay the AMT, do not make that year-end home equity or tax payment until January. Put off expenses until next year and bring extra income, such as bonuses, into this year.

Congress has discussed fixing the AMT, but no long-term cure is on the horizon. It may be adjusted annually, so taxpayers will have to watch legislation to see if they can avoid the AMT, possibly one year at a time.

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