AMT Planning in General

The Alternative Minimum Tax: A Basic Understanding

Sunday, August 29th, 2010 | Print This Post | Email This Post

The Alternative Minimum Tax frequently is described as a “separate” or “parallel” tax system in an attempt to distinguish it from the “Regular” tax system that applies to all other taxpayers. But there really is only one tax system in the U.S. – our Internal Revenue Code – that applies to everyone. This article will illustrate how both the AMT and the Regular tax calculations follow the same common principles of taxation, as a useful starting point in understanding the individual AMT items that will be explored in future articles.

Here are the basic income tax concepts:

- we pay taxes on a number that we calculate that is known as “taxable income”
- we arrive at taxable income by adding up our various sources of income and then subtracting a certain allowable number of deductions
- not all income is subject to tax
- little of what we spend each year may be taken as a tax deduction
- we then apply the appropriate income tax rate to our taxable income
- the result then is each of our individual shares of the national tax burden.

These basic concepts apply both for the AMT as well as for the Regular Tax, with differences in the individual components of the computations:

- on the income side, more is taxed under the AMT than under the Regular Tax
- on the deduction side, fewer are allowed under the AMT than under the Regular Tax.

The real “hit” from the AMT is that the tax that ultimately is due is the greater of the AMT or the Regular Tax. This is just the way the tax law works.

Most of the AMT hit comes from the deduction side – deductions that an individual is allowed to take for the Regular Tax but is not allowed to take for the AMT. Some deductions are not allowed at all for the AMT, while others are allowed, but to a lesser degree. The Regular Tax deductions that are not allowed at all for the AMT are:

- the standard deduction
- the deduction for personal exemptions
- the itemized deduction for state and local taxes
- interest on certain second mortgages and home equity lines of credit
- miscellaneous itemized deductions

The Regular Tax deductions that are allowed, but to a lesser extent for the AMT are:

- the itemized deduction for medical and dental expenses
- many business expenses such as depreciation, depletion, and research expenses, among others

On the income side, there are fewer differences. The more significant ones are:

- tax-exempt bond interest that is from a “private activity bond”
- income from the exercise of an “incentive stock option” (“ISO”)
- state income tax refunds

It is important to note that tax planning opportunities exist for each and every one of these AMT items. Each one is different, of course, but AMT planning generally can be grouped into the following categories:

- payment of expenses that are AMT items in one year versus another
- choice of a different investment strategy in terms of stocks, bonds, etc.
- choice of a different financing strategy when taking out a loan
- choice of a different business accounting method

Certain AMT items cannot be avoided (property taxes for homeowners, for example), but because income and deductions and tax rates do not remain static from year to year, the AMT frequently can be reduced simply by moving an AMT item like property taxes into a different year. Other AMT items may be eliminated in part or in full if they are covered by one of the other tax planning strategies listed above.

The essence of AMT planning is to 1) first determine which items are causing the taxpayer to fall into the AMT, and then 2) take the appropriate action to lessen, if not eliminate, the effect of each item. All of the AMT-reducing planning opportunities will be individually explored in future articles.

Posted in AMT Planning in General, Calculation of the AMT | No Comments »

Standard Deduction or Itemized? The AMT Requires Additional Analysis

Tuesday, April 6th, 2010 | Print This Post | Email This Post

A common question that arises at tax time is whether to itemize or take the standard deduction. For individuals paying the Regular Tax the decision is easy, but when the AMT is involved there is one extra step that needs to be taken. As will be seen in the example below, this step can save the taxpayer thousands in AMT dollars.

Annual election

The basic choice – itemizing vs. taking the standard deduction – is an election a taxpayer makes each year when the tax return is filed. The election is binding for both the Regular Tax and the AMT; a taxpayer cannot itemize for one and take the standard deduction for the other.

Itemized deductions

The major categories of itemized deductions are Medical and Dental, Taxes, Charitable Contributions, Home Mortgage Interest, Casualty Losses, and Miscellaneous. All of these are deductible under the Regular Tax. Under the Alternative Minimum Tax, however, the itemized deduction categories of Taxes and Miscellaneous Itemized Deductions are disallowed in their entirety, while Charitable Contributions are fully allowed. The categories of Medical and Dental, Home Mortgage Interest, and Casualty Losses also are allowed, at least in part.

Standard deduction

The standard deduction is a fixed dollar amount, adjusted annually for inflation. This may be taken in lieu of itemizing deductions. Currently this dollar amount is $11,400 for a married couple filing jointly.

Step 1 – compute the lowest Regular Tax

The Regular Tax, of course, is the starting point, and the choice here seems simple: if the standard deduction is greater than the taxpayer’s itemized deductions, then the standard deduction will result in a lower tax liability. If the taxpayer is paying the Regular Tax, nothing more needs to be done. If, however, the taxpayer is in the AMT, it is critical then to go to step 2 to avoid overpaying taxes.

Step 2 – recalculate the tax liability using itemized deductions

Going back to our married couple, even though their itemized deductions were less than the $11,400 standard deduction, they need to recalculate their taxes taking itemized deductions instead of the standard deduction. Although this seemingly would increase their taxes, it may actually reduce their AMT, or even possibly even eliminate it as in the example discussed below.

Example

To illustrate how this analysis would work, assume a couple lives in Florida, a state with no income tax, and is renting their home so they have no real estate taxes or mortgage interest. All the couple has for itemized deductions is $10,000 of charitable contributions. They have $250,000 combined salaries and wages, and $50,000 of dividends and capital gains.

When this couple starts out with step 1, they note that their $10,000 of itemized deductions is less than the $11,400 standard deduction, so they elect to take the standard deduction. At first blush, this seems to be the correct thing to do because their taxable income is $1,400 less by doing this than if they had itemized, but in actuality this would be a very costly mistake for them to make.

Under these facts the couple would pay $64,634 in taxes – $61,610 of Regular Tax and $3,024 of Alternative Minimum Tax. Under the AMT, they receive no benefit from the standard deduction, and they are wasting the Alternative Minimum Tax benefit they could get from the $10,000 charitable contribution deduction. If, instead, in this example the couple elected to itemize, their tax liability would be $62,072 – all Regular Tax, with no AMT. Even though they gave us $1,400 in Regular Tax deductions, they saved $2,562 and completely eliminated the AMT!

Conclusion

It is critical that Alternative Minimum Taxpayers take this extra step. At first it may seem counterintuitive to be taking the smaller of itemized deductions or the standard deduction, but thinking differently can actually end up saving significant taxes.

Posted in AMT Planning in General, Calculation of the AMT, Standard Deduction | No Comments »

Who Has to File the Form 6251?

Sunday, March 21st, 2010 | Print This Post | Email This Post

A common question that is asked is who has to file the IRS Form 6251, “Alternative Minimum Tax – Individuals.” The answer seemingly is simple – those who have to file the Form 6251 are those who owe the Alternative Minimum Tax. If a taxpayer does not owe the AMT, the 6251 does not need to be attached to the Form 1040. But how does a taxpayer know if he owes the AMT? There are several different ways to approach this; these are discussed below.

1. Fill out the Form 6251

Each and every taxpayer is responsible to determine the taxes he owes, so he alone is responsible to test for the AMT. Filling out the form is one sure way to do this; if the AMT is not owed, the form simply can be discarded. But with the IRS estimating that it takes 21.4 hours on average to complete the Form 1040, including recordkeeping and other requirements, why add to this burden if there is any way around it?

2. Fill out the worksheet located in the Form 1040 instructions

The IRS has plenty of instructions. The 2009 version of the basic Form 1040 instructions is 175 pages long, and buried in among all that good knowledge is a worksheet to help taxpayers determine of they owe the AMT (for 2009 it is located on p. 41). But this worksheet is of limited assistance because it focuses only on the basic computation, and whether a taxpayer’s itemized deductions or the phaseout of the AMT exemption is what is triggering the AMT.

What the worksheet does not do is help a taxpayer who has any of the 17 AMT items and credits that are listed there. If a taxpayer has any one of these, he is told to “fill in Form 6251 instead of the worksheet.”

3. Go to the IRS web site and check out its “AMT Assistant.”

This is a handy little tool, but again is of limited utility because it simply is an electronic version of the worksheet found in the Form 1040 instructions. If a taxpayer has none of the 17 items, this can save him from having to do the actual calculations himself. But if the taxpayer has any one of the items, it’s back to the Form 6251.

4. If I didn’t pay it last year then I don’t owe it this year (also known as the “head in the sand” approach)

It’s probably fair to say that it is not anyone’s idea of fun to fill out IRS forms, especially if it is not necessary to do so. So one approach is that, if the taxpayer did not owe the AMT last year, and assuming no big changes in income or deductions this year, the odds are that the AMT won’t be due again this year. But for some taxpayers it doesn’t take much of a fluctuation in income or deductions to get caught in the AMT. Another problem is that this approach fails miserably if Congress does not once again extend the “patch,” the annual indexing of the AMT exemption amount for inflation. If the patch is not acted on again this year, the number of individuals owing the AMT will increase from the current 4.4 million to a projected 26.7 million. As of today’s date, the patch has not been enacted for 2010, which means that 22.3 million taxpayers cannot rely on the test of not having paid the tax in the prior year.

5. Use the AMT Planning Model / Dual-tax Calculator at AMTIndividual.com

Fast and easy way to help you determine if you are in the AMT and how much AMT you will owe. It will also show you why you are in the AMT, what items are trapping you, and how to reduce or possibly eliminate the AMT in future years. The Free edition helps individuals better understand the AMT and what items are trapping them for the most recent tax return. The Deluxe edition is a comprehensive version that adds customized, written strategies and the AMT Planner to plan for this current year. Go to www.amtindividual.com to learn more.

Posted in AMT Planning in General, Calculation of the AMT, The "patch" | 1 Comment »

Alternative Minimum Tax Impact from Investing Activities

Sunday, March 14th, 2010 | Print This Post | Email This Post

Income that is earned from investments is a significant factor in the amount of Alternative Minimum Tax an individual pays. Certain types of investment income (dividends, capital gains, certain interest, e.g.) as well as the amount of this income in relation to the taxpayer’s other income, all factor into the AMT formula. A taxpayer usually has much more control over investment income than he does his salary, for example, making this source of income much more important from an Alternative Minimum Tax planning point of view. In general, an investment portfolio can be changed any time a taxpayer finds it advantageous to do so.

Discussed below are a few key items associated with investing activities, and the AMT planning opportunities that may exist.

Dividends and capital gains

Most dividends on common stocks are “qualifying,” and, thus, are eligible for a lower tax rate than “ordinary income,” which consists of things such as salaries and wages, interest income, rental income, and the like. Similarly, a capital gain that qualifies as a “long-term” capital gain also is eligible for this lower tax rate. As discussed in a recent article on amtblog.com, even though the tax rate on dividends and capital gains is the same for both the Regular Tax and the AMT, the effect on a taxpayer’s exemption amount can mean that these items of investment income are the reason a taxpayer is paying the AMT.

Planning strategy – use a model such as that available on AMTIndividual.com to determine the real tax rate being paid on dividends and capital gains. For maximum returns, investors should always consider after-tax yield when evaluating investment alternatives.

Tax-exempt bond interest

In general, municipal bond interest is exempt from Federal tax. However, certain muni bonds are designated “private activity” bonds, depending on how the proceeds of the bond issuance are used. Interest from private activity bonds continues to be exempt for the Regular Tax, but it is fully taxable for the AMT, with the result that the after-tax yield is significantly less than what the taxpayer originally thought he was earning. Note that, in order to boost yields, certain muni bond funds may allocate a portion of their portfolios to private activity bonds.

Planning strategy – Again, a taxpayer always should be considering after-tax yield in evaluating investments. An AMT payer generally should not be holding private activity bonds. If the investment is in mutual fund form, there are plenty of muni bond funds available that do not invest in private activity bonds.

Partnerships and other “pass-through” investments

In many cases partnerships themselves will have AMT items, but since a partnership “passes through” these items, it is the individual partner who ends up paying the AMT. For example, a real estate partnership may use a depreciation method that is allowable for the Regular Tax but is not allowable for the AMT. This difference in depreciation methods is an AMT item that will be reported to the partner on the Form K-1 he receives from the partnership, which, in turn, must be reported on the partner’s own AMT schedule, the Form 6251.

Note that this same pass-through treatment results in the case of S corporations, LLCs, and certain estates and trusts.

Planning strategy – Before investing in a partnership, an individual should inquire about AMT items that the partnership may generate. Once invested, it generally is too late to do anything about them.

Conclusion

While the old maxim that taxes should not determine an investment strategy is true, nevertheless an investor who is stuck in the AMT may be earning a significantly lower after-tax yield on his investments than he realizes. Remember that it is only after-tax income that an investor actually gets to keep; ignoring taxes, especially the AMT, is unwise.

Posted in AMT Planning in General, Capital gains & Dividends, K-1 / All other AMT Items, Private Activity Bonds | No Comments »

The Estate Tax and the AMT – An Urgent Concern for Taxpayers

Wednesday, March 3rd, 2010 | Print This Post | Email This Post

As we sit today, we do not have an estate tax in 2010. The problem this presents is that, through an interplay of the estate tax rules and the Alternative Minimum Tax rules, if Congress does not act to reinstate the estate tax for 2010 there will be a significant increase in the number of individuals paying the AMT, not only in 2010 but in all future years as well.

The AMT issue

The AMT side of this issue stems from the impact that capital gains have on an individual taxpayer’s AMT. While long-term capital gains are taxed at the same tax rates for both the Regular Tax as well as the AMT, an increase in an individual’s taxable income, whether from ordinary income or from capital gains, in many cases means a decrease in the individual’s AMT exemption amount.

Here is how this works: once a certain level of Alternative Minimum Taxable Income (AMTI) is reached, every dollar of additional income will reduce the taxpayer’s exemption by 25 cents. The threshold level for a married couple filing jointly is $150,000; it is lower for singles and marrieds filing separately. These thresholds, as well as the mechanics of the AMT exemption phaseout, are explained in the lower part of the IRS Form 6251.

The estate tax issue

Here is the estate tax issue: capital gains are the excess of the selling price of a capital asset, such as a security, over the taxpayer’s basis in that security. The most common concept of basis is what the taxpayer paid for the security when he bought it. For example, a share of stock purchased for $100 will have a tax basis of $100; if it is later sold for $120, the taxpayer has a capital gain of $20 on which he will pay tax. But in the case of inherited securities the determination of basis is very different.

So long as the estate tax is in effect, a beneficiary receives a tax basis in any inherited property equal to its fair market value on the date of death. In the vast majority of cases, this is a “stepped-up” basis because, over time, stocks generally appreciate. This is especially the case for senior citizens because they generally have a long-term hold strategy. All of this means that a decedent’s tax basis typically is well below a stock’s current price. In the above example, that share of stock worth $120 may have been acquired by the decedent for $50, or even less.

The two rules together

With the estate tax in place, if the decedent passes away when that stock is worth $120, that amount is now the tax basis for the heir when the shares are distributed to him. Thus, if the heir sells it for $120, he has zero gain to pay tax on, and this has zero effect on his AMT exemption amount.

Suppose, however, the estate tax is not put back in place. In this case the heir’s tax basis in the above example is $50 because he receives a “carryover” basis instead of a stepped-up basis, and a sale at $120 would result in a $70 capital gain. If the individual has AMTI over the specified threshold, this $70 gain on each share of stock sold would decrease his AMT exemption by $17.50 (25% of the gain). If enough shares are sold, this could have a significant and direct impact on the individual’s Alternative Minimum Tax liability.

Summary

Warren Buffet and Bill Gates are long-standing advocates for the estate tax. While these two probably are not AMT payers, every one of the 4.3 million individuals currently subject to the Alternative Minimum Tax, as well as all other taxpayers who are at risk of being drawn into the AMT, should be right there joining these two in advocating reinstatement of the estate tax!

Posted in AMT Exemption, AMT Planning in General, Legislation/tax law changes, Other issues | No Comments »

The Alternative Minimum Tax: Basics of What You Need to Know

Sunday, February 14th, 2010 | Print This Post | Email This Post

The Alternative Minimum Tax often is described as a “separate” tax system or a “parallel” tax system, separate and distinct from the “regular” tax system that applies to everyone. While the AMT creates a unique fraternity with a membership of over four million out of a total taxpayer population of over 150 million, there really is only one tax system in the U.S.

Our tax system is complicated, but the underlying concept is basic:

- we pay taxes on a calculated number that is known as “taxable income”
- we arrive at taxable income by adding different sources of income and then subtracting a certain number of deductions
- not all income is subject to tax
- little of what we spend each year may be taken as a tax deduction
- we apply the appropriate tax rate to our taxable income
- the result is our individual share of the national tax burden.

This same concept applies for the AMT as it does for the Regular Tax, but the individual components of the computation are different:

- more income is taxed under the AMT than it is under the Regular Tax
- fewer deductions are allowed under the AMT than under the Regular Tax.

The key to remember is that, under these alternative computations, the tax that will be due is the greater of the AMT or the Regular Tax. While this may not seem fair, and in many cases it isn’t, that’s just the way it is. One has no choice.

The bulk of the AMT “hit” comes from the deduction side – deductions that an individual is allowed to take for the Regular Tax but is not allowed to take for the AMT. Some deductions are not allowed at all for the AMT, while others are allowed, but to a lesser degree. The Regular Tax deductions that are not allowed at all for the AMT are:

- the standard deduction
- the deduction for personal exemptions
- the itemized deduction for state and local taxes
- interest on certain second mortgages or home equity lines of credit
- miscellaneous itemized deductions

The Regular Tax deductions that are allowed to a lesser extent for the AMT are:

- the itemized deduction for medical and dental expenses
- many business expenses such as depreciation, depletion, and research expenses, among others

On the income side, there are fewer differences. The key ones are:

- tax-exempt bond interest that is from a “private activity bond”
- income from the exercise of an “incentive stock option” (“ISO”)
- state income tax refunds

It is important to note that tax planning opportunities exist for all of these AMT items. Each one is different, of course, but the planning generally falls into the following groupings:

- paying certain expenses that are AMT items in one year versus another
- choosing a different accounting method
- altering an investment strategy
- altering a financing strategy

Certain AMT items cannot be avoided in their entirety (property taxes, for example, at least while one owns a home), but because income and deductions and tax rates do not remain static from year to year, the AMT almost always can be reduced in part by moving the AMT item into a different year. Other AMT items, however, may be eliminated in part or in full if they are covered by one of the other tax planning strategies listed above. Thus, the essence of AMT planning is 1) first determining which items are causing the taxpayer to fall into the AMT, and then 2) taking the appropriate action to lessen, if not eliminate, the effect of each item.

Posted in AMT Planning in General, Calculation of the AMT | 1 Comment »

Alternative Minimum Tax Planning for 2009 – What Still Can be Done Even Though We are in 2010

Thursday, January 14th, 2010 | Print This Post | Email This Post

With the turning of the calendar to 2010, many of the opportunities for 2009 AMT planning are gone. This article will provide a brief overview of the AMT strategies that still are available for 2009, as we sit today, and some of these will be explored in more detail in future articles. Many of these items are somewhat narrow in scope, but if just one applies to a particular taxpayer’s situation, it definitely can serve to reduce an AMT bill that otherwise would be due in April.

Depreciation – Rental property and property used in a business may be depreciated. The law allows a taxpayer to choose among several depreciation methods, and this choice is not made until the tax return is filed. Some depreciation methods result in an AMT item while others do not.

Depletion – A taxpayer investing in oil & gas or other mineral properties may take a deduction for his investment in a manner similar to depreciation. Also similar to depreciation, some depletion deductions are AMT items while others are not. This choice is made when the tax return is filed.

Intangible drilling costs and mining costs – The same as depreciation and depletion above, certain cost-recovery methods for these types of investments, which are chosen at tax return time, can trigger the AMT.

R&D – Research and development costs incurred by a business may be deducted currently instead of being amortized over time, resulting an AMT item. If the business is an LLC, partnership or S corporation, this AMT item will be reflected on the taxpayer’s individual Form 1040. The choice of deduction is made at tax return time.

Circulation costs; long-term contracts – Certain types of businesses receive more beneficial treatment of deductions for the Regular Tax than for the AMT, resulting in AMT items. Similar to the R&D, the AMT effect depends on the type of business entity. The choice of deduction is made at tax return time.

Incentive Stock Options (ISOs) – ISOs receive very favorable Regular Tax treatment at the time of their exercise – they simply are not taxed at that time. Instead, assuming the numerous ISO requirements are met, income from these options is not taxed until the underlying stock is sold at a later time. At that point, the income is taxed at favorable long-term capital gain rates instead of ordinary income Regular Tax rates. Under this normal scenario, an AMT item is triggered on the date of exercise. However, a taxpayer has until one year after date of exercise to “disqualify” the options, resulting in ordinary income but also completely eliminating the AMT item. A future article will discuss in some detail this “disqualification” concept as an AMT-planning strategy.

Posted in AMT Planning in General | No Comments »

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 10

Sunday, December 27th, 2009 | Print This Post | Email This Post

Year-End AMT Planning Wrap-Up – Part 1

In our 10-week series of articles on tax planning for the Alternative Minimum Tax, we have looked at many things a taxpayer can do to reduce his AMT liability. With only four days left in which to act in order to reduce 2009’s taxes, here is a summary of these items, with reference to the date each article appeared on amtblog.com. Please refer back to the article for the specific tax-saving steps that still may be taken before year end.

State and local taxes

This item affects 94% of all AMT payers, yet it is one of the easiest to plan for and it can have the most direct impact on a taxpayer’s Alternative Minimum Tax. There are three types of taxes here:

1. Property taxes – by weighing the relative factors of property tax burden, percentage of AMT payers, and size of population, here is a ranking of the top 10 states that are hit the hardest by this item. Residents of these states really do need to focus on this one in particular. See the November 8th article posted on amtblog.com, “Property Taxes.”

#1 – New York
#2 – New Jersey
#3 – California
#4 – Illinois
#5 – Massachusetts
#6 – Connecticut
#7 – Maryland
#8 – Pennsylvania
#9 – Virginia
#10 – Ohio

2. Income taxes – the tax dollars here are larger, on a per-taxpayer basis, than property taxes. While the AMT planning takes a little more work than property taxes, the potential savings still are there. See the amtblog.com article posted on November 2nd, “State Income Taxes.”

3. Sales tax on new cars – this is easy money for those who bought a new car this year, or still are contemplating buying one. See the amtblog.com article posted on November 11th, “Sales Tax on New Cars.”

Stock options, in particular Incentive Stock Options (ISOs)

A large number of corporate employees, generally ranging from the mid-management level up to the “C Suite” folks, have stock options granted to them by their employers. If these options are ISOs, AMT planning is critical because of the major impact the exercise of these options can have on an individual’s Alternative Minimum Tax. Our two-part series of articles appearing on amtblog.com on December 3rd and December 6th, “Incentive Stock Options – Parts 1 and 2,” go through the basic steps in determining whether a taxpayer does in fact have an ISO – often confused with the other types of stock options and equity grants an employer may offer – and then explains how these ISO exercises trigger the AMT. This is a very important read for all those who either have exercised stock options or are contemplating exercising stock options.

Capital gains

The impact of capital gains on a taxpayer’s Alternative Minimum Tax can be a real surprise – and, unfortunately, not a pleasant surprise At first blush capital gains appear to be AMT-neutral, but this is far from the case. The December 13th article on amtblog.com, “Investments – Capital Gains,” explains this issue. To the extent a taxpayer has recognized capital gains in 2009, and/or “harvested” capital losses to offset capital gains, there can be a direct AMT impact. Any capital gain or loss activity between now and December 31 also will have this impact.

Summary

It is not too late to take action on any of the above items for 2009, but time is short. Once the ball drops in Times Square, you’ll be planning for 2010!

Posted in AMT Planning in General, Capital gains & Dividends, Incentive Stock Options Exercised, State Income & Other Taxes | No Comments »

It’s Fall: 10 Weeks of Alternative Minimum Tax Planning Ideas…Week 1

Saturday, October 31st, 2009 | Print This Post | Email This Post

“It’s the time of the season” was a popular song some years ago. The barbecue grills are put away, the kids are back in school, and the foliage is starting to turn. The 2008 tax return season was officially over on October 15; now it’s time to start thinking about 2009.

With only two months to go, do you know yet whether you’ll owe more taxes in April or be getting a refund? Do you know that you have the opportunity – now – to make your refund bigger or the check you write the IRS smaller? All it takes is brief look at your tax situation and consideration of what you can do in the next 60 days. If you wait until January it’s too late to lower your 2009 taxes.

This is especially true for those of you stuck in the Alternative Minimum Tax. For AMT payers, there is quite a list of things you can do to reduce your AMT bill, and all of them are very simple.

Over the next two months we’ll be doing a series of articles on what these things are, but here is just a sample of what we’ll be talking about:

Property taxes – many of you already have received your property tax bill. Assuming you have a choice of paying it in December or in January, the simple act of when you write out the check can have a direct impact on the AMT you’ll pay.

State income taxes – similar to property taxes, your state income taxes have an impact on your AMT. The more state taxes you pay this year the higher your AMT bill will be – another opportunity to have an immediate impact on the tax you’ll pay.

Example – assume you owe $5,000, either in property taxes or in additional state income taxes. If you are in the AMT in 2009 and pay these taxes in 2009, you will get zero tax benefit. If you wait until January to pay the $5,000, and then are not in the AMT in 2010, you will achieve a tax savings from the IRS of up to $1,750.

There are many other ideas – simple ones like this – that we’ll be writing about between now and year-end, and we’ll be explaining each one in plain English so you can understand them and act on them. Don’t wait any longer – “it’s the time of the season.”

George Bauernfeind is with AMTIndividual.com, providing analysis, customized strategies, and an online dual tax calculator / planner to help you reduce your Alternative Minimum Tax.

Posted in AMT Planning in General, State Income & Other Taxes | No Comments »