Planning for Alternative Minimum Tax

Back in 1969, Congress came up with a plan to ensure that everyone – specifically millionaires with lots of tax shelters and deductions – paid at least some federal income tax. That legislation became the alternative minimum tax (AMT), which over the decades morphed into a Frankenstein’s monster – lurching about, frightening peasants and wealthy alike.

AMT is a parallel tax system that taxes a broader range of income than the regular income tax and won’t let you use certain deductions, exemptions and credits. Taxpayers must calculate both their regular tax and AMT and pay whichever is higher. Last year about four million people found themselves owing AMT, primarily because post-2000 reductions in the regular income tax rates were not reflected in the AMT.

Who is at risk for AMT? In general, taxpayers who:

  • receive tax-exempt interest from private-activity bonds (which fund semi-public projects such as stadiums or airports);
  • exercise incentive stock options (ISOs) to acquire stock at a bargain price;
  • sell investments with significant long-term capital gains;
  • deduct large amounts of state and local taxes, interest on home-equity loans, miscellaneous expenses or medical bills, or take advantage of certain tax credits;
  • claim numerous personal and dependency exemptions;
  • suffer phase-out of their AMT exemptions because their incomes are too high;
  • claim accelerated depreciation on business property;
  • take deductions for various tax shelters such as intangible drilling costs or excess percentage depletion allowances from oil or gas wells or mines.

How can you avoid AMT, this year or in the future? Here are some ideas:

  • First, monitor news reports on AMT law changes expected to pass Congress this year. Check with your tax adviser on how any new AMT rules will affect you.
  • Switch from private activity bonds (or tax-exempt bond funds that contain them) to AMT-free bonds or mutual funds.
  • Avoid exercising incentive stock options all at once; instead, stretch them out over several years;
  • Sell profitable investments with an eye to minimizing long-term capital gains. Consider installment sales of investment property that spread gains over more than one year;
  • If you expect to pay AMT in 2008 but not in 2007, investigate whether you can pre-pay 2008 state and local taxes this year and accelerate other deductible expenses from 2008 into 2007, such as miscellaneous expenses and medical expenses. Reverse this strategy if 2007 looks like an AMT year but 2008 does not.
  • Use a multi-year strategy for AMT; tax moves that keep you out of AMT this year could push you into AMT in 2008.


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Copyright © 2007 by R&R Newkirk. All rights reserved.

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