Be Prepared, AMT Ahead

Aug 27, 2015

What began as a well-intentioned tax on the wealthy has presently morphed into one of the most disliked (and complicated) taxes in US history. Originally, alternative minimum tax (AMT) was enacted in 1969 to alleviate the tax gap between the upper and lower classes. That year, some 155 high-income households earned over $200,000 and did not owe any federal income tax.

Today, the middle class is the largest group affected by this tax and, as a result, important deductions claimed by these individuals are being phased out. These disallowed deductions include: personal exemptions (including those of your child and dependents), state and local income taxes, property taxes, private activity bond interest, investment fees, other miscellaneous itemized deductions and more.

What can you do to mitigate this tax? Unfortunately, Congress has made tax planning in this area very difficult. However, there are steps you can take to lessen its impact. If you know you are subject to AMT and have property taxes due, wait until after year-end to pay them—prepaying offers no benefit as the deduction will be disallowed for AMT tax purposes. Similarly, see if your financial advisor will allow for fee payment after year-end. Consider whether deducting taxes on a Schedule C or Schedule E might make more sense. Taxes which qualify for a deduction on these schedules are not subject to the strict add back rules that would otherwise apply. Consider investing in tax-free non-private activity bonds. Assuming the yield on the bonds are similar, this can avoid the add back that follows private activity bonds resulting in an overall higher net yield.

Courtney Elgin, CP

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