Personal Exemptions

It’s Fall: 10 Weeks of Alternative Minimum Tax Planning Ideas…Week 10

Tuesday, December 29th, 2009 | Print This Post | Email This Post

Year-End AMT Planning Wrap-Up – Part 2

The AMT items that were talked about in Part 1 of this wrap-up generally were the bigger ones that can, depending on a taxpayer’s situation, present immediate year-end Alternative Minimum Tax savings opportunities. But the other items that were discussed in this 10-week series also are important in making sure the least amount of AMT is paid. Here is a brief recap of these other items, with references to the amtblog.com articles in which each appeared.

Investments: Private Activity Bonds – an individual investing in tax-exempt municipal bonds can receive an unpleasant surprise when he discovers that AMT has to be paid on the interest income from a certain type of municipal bond. See the December 18th article posted on amtblog.com.

Miscellaneous Itemized Deductions – business or investment-related expenses may be deductible under the Regular Tax, but they are not for the AMT. Several planning ideas on how to minimize this impact are presented. See the November 14th article posted on amtblog.com.

Limitation on Itemized Deductions: AMT Adjustment – when a taxpayer is in the AMT, the limitations that apply to itemized deductions are calculated differently from the limitations that apply for the Regular Tax. See the November 25th article posted on amtblog.com.

State Income Tax Refunds: AMT Adjustment – because of the different AMT treatment of state and local tax deductions, any adjustment to these deductions – for example, a refund of overpaid state taxes which generally is treated as income when received – is itself then given different treatment for the AMT. See the November 29th article posted on amtblog.com.

Standard Deduction – a taxpayer is allowed no standard deduction in calculating the AMT. An interesting planning idea here could mean that an AMT taxpayer might be better off not claiming the standard deduction at all. For a discussion of this opportunity see the November 18th article posted on amtblog.com.

Personal Exemptions – similar to the standard deduction, a taxpayer is allowed no deduction for personal exemptions in calculating the AMT. Not a whole lot can be done here, but there always are at least a few planning ideas. See the November 22nd article posted on amtblog.com.

The AMT Exemption, also known as “the annual patch” – the AMT Exemption amount is set annually by Congress. This is a prescribed amount by which a taxpayer’s Alternative Minimum Taxable Income must exceed his Regular Tax taxable income before the AMT itself is triggered. If Congress were to fail to adjust this exemption amount, 24 million new taxpayers would be pulled into the AMT, in addition to the four-plus million already stuck there. See the December 21st article posted on amtblog.com. Also, pay careful attention to the news we will be seeing on this in the near future as we anxiously await Congress’ fix on this again for 2010.

Good luck with your AMT planning. Hopefully each of these articles provided a simplified explanation along with a few 2009 Alternative Minimum Tax savings ideas. Soon we’ll be working on 2010!

Posted in AMT Exemption, AMT Planning in General, Misc Deductions 2-percent Floor, Personal Exemptions, Private Activity Bonds, Standard Deduction | No Comments »

It’s Fall: 10 Weeks of Alternative Minimum Tax Planning Ideas…Week 4

Sunday, November 22nd, 2009 | Print This Post | Email This Post

Personal Exemptions

A personal exemption deduction is allowed for a taxpayer, a spouse and any dependents such as children and other relatives. The amount for 2009 is $3,650 for each exemption, but this amount is reduced if the taxpayer’s Adjusted Gross Income (AGI) exceeds a certain amount.

In calculating the Alternative Minimum Tax, however, no deduction is allowed for personal exemptions. Thus, AMT taxable income will be higher than Regular Tax taxable income by the amount of exemptions claimed. For example, a married taxpayer with two children would be entitled to a Regular Tax deduction of $14,600 for these exemptions. If Regular Tax income for this family were $100,000, then AMT income would be $114,600.

There really isn’t anything that can be done to change the AMT effect of personal exemptions for the taxpayer and spouse – the tax law simply takes them away for purposes of the AMT. However, if there are dependents, a few situations exist where there may be planning opportunities to save taxes within the family unit.

One example is if the dependent is a daughter, a son, or other relative with income of her own but yet the taxpayer is still providing substantial support. In figuring out who provides more than half of the dependent’s support – the basic eligibility test for claiming the exemption – one looks to whether income of the dependent is or is not spent on her own support. So, for example, if the daughter is attending college and also at the same time working, any of her earnings that are spent on her support count towards her eligibility to take the personal exemption. Even though the student’s tax bracket most likely would be lower than the parent-taxpayer’s, any tax benefit certainly is better than the zero tax benefit the parent is getting because of the AMT.

Another example is in the case of divorced or separated parents, who may or may not have executed a multiple support agreement. The tax rules essentially allow the parties to agree which of them will take the child’s personal exemption. The planning here is simple, assuming lines of communication between the parties remain open – if one is in the Alternative Minimum Tax but the other is not, why not arrange to give the one not in the AMT the exemption deduction?

Posted in Personal Exemptions | 3 Comments »