Type of Taxpayer

Year-End Tax Planning – Should You Accelerate or Defer Income to Minimize Your Alternative Minimum Tax?

Saturday, November 19th, 2011 | Print This Post Print This Post | Email This Post Email This Post

In connection with year-end tax planning, much has been written about accelerating or deferring deductions.  The sometimes-overlooked question of accelerating or deferring income deserves just as much attention, especially for those in the Alternative Minimum Tax.  This article will look at what needs to be considered in planning around income recognition, including a summary of the different types of income to which this planning can apply.

 

What happens with the AMT calculation when one’s income level changes?

 

Tax brackets for the Alternative Minimum Tax are progressive, as are those of the Regular Tax.  What this means in simple terms is that additional amounts of income are taxed at a higher rate than the tax rates that apply to the lower levels of income.  The Regular Tax has six brackets, ranging from 10% to 35%, while the AMT has just two – 26% and 28%.  As will be explained below, however, there are other adjustments in computing taxable income that actually can make these stated tax brackets significantly higher.

 

What are the real AMT brackets?

 

In calculating the Alternative Minimum Tax, an individual is allowed to subtract an exemption amount from what otherwise would be taxable income.  This exemption amount is $74,450 for a married couple in 2011.  As has been discussed in previous articles, however, the exemption is phased out as a taxpayer’s income increases.  This phaseout has the direct  effect, therefore, of increasing the effective AMT tax rates for individuals who find themselves in this phaseout range.

 

For 2011, for the married couple, the phaseout begins at $150,000 and doesn’t stop until their income exceeds $440,000.  Within this range, each incremental $100 of income will result in a loss of $25 of the AMT exemption.  The result is that a 28% Alternative Minimum Tax bracket is increased by a factor of 25%, resulting in an effective AMT tax bracket of 35%!

 

What does all this mean for planning?

 

Knowing one’s effective tax bracket is the only way to do proper AMT planning.  It can be a costly mistake to deliberately accelerating income, thinking one is in an Alternative Minimum Tax bracket lower than the Regular Tax bracket, only to find out this actually is not the case.  Many year-end tax planning articles routinely suggest that people in the AMT do exactly this, but without knowing what your effective AMT tax rate is it could instead turn out to be a costly mistake.

 

What types of income can be accelerated or deferred?

 

The answer to this question will depend on each individual’s situation- i.e., whether the person is employed or self-employed, what kind of investments the person has, etc.  Discussed below is a brief overview of some of the types of income that an individual may be able to accelerate or defer at year-end.

 

-  Employee compensation such as bonuses and stock options

 

Some employers allow employees the choice of taking their bonuses currently or deferring them to a future year.  In addition, employees may be granted stock options, and the timing of when these options are exercised is entirely up to the employee – they can be exercised just as easily in December as they can in January.  If the employee has what are known as nonqualified stock options, taxable income will be recognized immediately on the date of exercise – both for the AMT as well as Regular Tax purposes.  If the options are qualified options (these are more commonly known as incentive stock options, or ISOs), there is no taxable income on the date of exercise for Regular Tax purposes, but there is for the Alternative Minimum Tax.

 

-  Business income from self-employment, LLCs or partnerships

 

A business usually has some degree of control at year-end over its net income for that last month of the tax year.  For example, a cash-method business could pay outstanding bills in December to reduce income, or wait to pay them in January, which would directly affect the amount of income reported on the business owner’s tax return.  The business also could hold off from sending out certain bills out towards the end of the year, thus postponing income into the following year.

 

-  Investment income

 

Here are some acceleration or deferral thoughts on a few types of investments:

 

Capital gains – an individual has complete control over the timing of any sales of investments, so capital gains easily could be recognized this year or next.

 

Rental income – a landlord might ask for the rent check that is due on January 1st to be paid a few days early.

 

Interest and dividends – as a longer-term strategy, an individual could shift in or out of bonds and/or dividend-paying stocks to affect the amount of interest and dividend income received on a current basis.

 

Conclusion

 

Knowing what tax bracket the taxpayer is in is critical to any tax planning, but especially so for individuals in the Alternative Minimum Tax.  The only way to minimize the AMT is to take a little time as we approach year-end to look at the options available in terms of what income might be moved between 2011 and 2012, and then to figure out which of these choices will result in the lowest tax burden.  With the holiday season keeping everybody pretty busy, it’s never too soon to start doing at this!

Posted in AMT Exemption, AMT Items, AMT Planning in General, Calculation of the AMT, Capital gains & Dividends, Incentive Stock Options Exercised, Investor, Self Employed, Type of Taxpayer | No Comments »

Incorporate Your Small Business and Avoid the Alternative Minimum Tax

Saturday, July 30th, 2011 | Print This Post Print This Post | Email This Post Email This Post

The Alternative Minimum Tax applies both to corporations as well as to individuals.  While many of the AMT rules are the same, there are some significant differences between the two.  One of the more significant of these differences is a provision that totally exempts Small Business Corporations from the AMT.  This can present real tax savings opportunities for individuals who are paying the Alternative Minimum Tax because of their business activities.

 

Small Business Corporation

 

A Small Business Corporation is an entity formed under state corporate law that has not made an election to be taxed as an “S” corporation.  An S corporation does not pay tax itself; rather the income and losses – and AMT items – of the entity “pass through” to the corporation’s shareholders and are reported on the Forms 6251 attached to their individual Forms 1040.  A “regular” corporation – including a Small Business Corporation – is separate from its owners, filing its own tax returns and paying its own taxes.

 

It should be noted that businesses that are formed and operated as sole proprietorships, partnerships or limited liability companies (LLCs) also pass through their income, losses and AMT items to the underlying owners just as S corporations do.

 

New business vs. existing business

 

A start-up business has total freedom to choose whatever form it wishes to operate in.  Existing businesses currently operating in one of the pass-through forms may want to re-form themselves as Small Business Corporations to take advantage of this AMT benefit.  While an S corporation may simply revoke its S election, for the other entities there are certain administrative costs associated with creating a new form of business that will need to be taken into consideration.

 

Total exemption from the AMT for a Small Business Corporation

 

In general the AMT applies to all corporations, just as it does to all individuals.  However, Congress decided that smaller businesses operating in the corporate form should be totally exempt from the AMT.  The test to qualify for this exemption is simple, and it is based on the gross receipts of the business.

 

If a small corporation has gross receipts of $5 million or less per year it qualifies as a Small Business Corporation, and, thus, it also qualifies for the AMT exemption.  The actual test is the average of the entity’s gross receipts over a three-year period.  Once a corporation initially qualifies as a Small Business Corporation under the $5 million test, in subsequent years it is allowed to have average gross receipts of up to $7.5 million while still retaining its qualification.

 

AMT items resulting from operating a business

 

This exemption from the Alternative Minimum Tax applies only to AMT items that result from operating a business.  It does not apply, for example, to nonbusiness AMT items such as the adjustments needed for an individual’s itemized deductions like state and local taxes, home mortgage interest, medical and dental, etc., as well as things like incentive stock options.

 

The following are the AMT items associated with operating a business:

 

-        depreciation, and corresponding adjustments on disposition of business property

-        net operating losses

-        depletion, intangible drilling costs and mining costs

-        R&D expenses

-        long-term contracts

-        circulation costs

 

Other tax issues to be considered

 

There are a number of non-AMT tax benefits resulting from operating a business in a pass-through entity that also need to be taken into consideration when evaluating the Small Business Corporation benefit.  For example, if a pass-through business has start-up losses, these losses may be deductible on the business owner’s personal tax return.  For a regular corporation, such losses are accumulated and may be used as a deduction only against future income of the corporation.

 

If the business is profitable, there is a possibility that the profits from a regular corporation effectively could be taxed twice unless proper planning is done.  With the corporation itself paying taxes on its income (after deducting any prior year losses), if it pays a dividend to its shareholders those profits would be taxed twice.  This problem can be avoided if the business owners are paid salaries, which are deductible by the corporation, thus avoiding this double tax issue.

 

Planning to take advantage of this AMT exemption

 

The key for any taxpayer considering taking advantage of this total exemption from the Alternative Minimum Tax is to start by looking at how much AMT is being paid as a result of the above-listed business AMT items.  Only if the total is material enough to offset the costs of changing the form of business, and only if the other tax issues mentioned above do not present negatives, should incorporation be considered.

 

Conclusion

 

As has been discussed in previous articles, each AMT item presents its own individual planning opportunities.  For the items that result from operating a business, a taxpayer needs to go through each and every one of them to consider the effects of the choices and tax elections he has.  As an alternative to this by-the-ones approach, having the business operating in a qualifying Small Business Corporation completely eliminates the need to do this, and might even result in totally avoiding the Alternative Minimum Tax!

 

 

Posted in AMT Planning in General, Depreciation & Disposition of Property, Self Employed, Type of Taxpayer | No Comments »

401(k) Roth Conversion: Alternative Minimum Tax Payers Need to Give this Serious Consideration

Saturday, April 16th, 2011 | Print This Post Print This Post | Email This Post Email This Post

Recent tax law changes have opened up a whole new area of tax planning around employee retirement plans.  Individuals with IRA accounts always have had the opportunity to do a Roth conversion, but now for the first time an employee’s 401(k) account also may be converted.  Because a 401(k) typically will have a much larger balance than an IRA, this tax opportunity deserves serious consideration, particularly for individuals who currently are in the Alternative Minimum Tax.

 

Background

 

This past September the Small Business Jobs Act of 2010 was signed into law.  One of the provisions in this act allowed, for the first time, a “regular” 401(k) to be converted to a Roth 401(k).  The sponsoring employer first must make the appropriate plan amendments to allow this, but because of the popularity of this provision it is estimated that over half of all employers already have made this change.

 

What happens upon conversion?

 

The dollars an employee contributes to a regular 401(k) are pre-tax.  What this means is that income taxes have not yet been paid on these contributions; instead, when distributions are taken from the plan, typically at retirement, taxes are paid at that point.  Along with the original contributions, the investment earnings in the 401(k) likewise are taxable when withdrawn.  In contrast, a Roth is funded with after-tax dollars, so, correspondingly, there are no taxes due at the time the funds are withdrawn.  Similarly, the earnings on these funds are not taxed at distribution.

 

At the time of conversion from a regular 401(k) to a Roth, income taxes must be paid on the full amount converted.  With this prepayment of taxes, and the 401(k) now officially a Roth, no taxes are due when distributions are made.

 

Example

 

Assume over the years you have put $100,000 into your regular 401(k), and the cumulative investment earnings are $50,000.  If you did a Roth conversion today, assuming you are in the 33% Federal bracket (Regular Tax; not the AMT), along with a state tax rate of 6%, you would pay $58,500 in taxes, leaving $91,500 for your retirement spending.

 

Compare this to an account that was a Roth 401(k) right from the start.  Since you would have paid the 33% and 6% taxes before the monies went into the account, you would have contributed only $61,000 ($100,000 less $39,000 in taxes).  Earnings on this at the same rate of growth as in the example above would have been $30,500, for a grand total in the account of $91,500.

 

The point

 

As was seen in the example above, there is one single most critical point in making a Roth conversion analysis: the comparison between the taxpayer’s current tax bracket and the tax bracket he or she expects to be in at retirement.  How does one go about making this comparison?

 

Tax brackets – assuming no changes

 

On the IRS web site one can see that, assuming married filing jointly status, the Regular Tax 28% bracket is reached at $83,600 of taxable income, the 33% bracket at $174,400, and the 35% bracket at $379,150.  Compare this to the AMT bracket of 26% for Alternative Minimum Taxable Income up to $175K, and 28% for everything over that level.  Ignoring for purposes of simplicity the fact that taxable income is not computed the same for the AMT as it is for the Regular Tax, looking at these brackets reveals something very interesting: AMT brackets are significantly lower at roughly comparable levels of income.

 

This fact alone is the reason individuals currently in the AMT definitely need to give serious consideration to doing a Roth conversion.  The potential for a 7% savings from differences in the tax brackets (28% vs. 35%, e.g.), or even more, definitely is there.

 

Tax brackets – there will be change

 

Making things a little more difficult, however, is the fact that tax brackets will change.  Someday the Democrats will get their way and the Bush tax cuts will be allowed to expire.  When this happens, Regular Tax rates will increase, and it will appear even more attractive to do a Roth conversion today.  Keep in mind, however, that one of the other likely changes in tax brackets simply will be the individual taxpayer’s level of income.  For most folks, income in retirement will be less than what it is while they are working, and, thus, that person’s tax bracket will decrease.  To what extent this will or will not offset the anticipated increase in the brackets from the law changing is up to each individual to decide.

 

Conclusion

 

The recent change in the tax law allowing Roth conversions presents every individual with a 401(k) a real opportunity to save taxes.  This opportunity is much greater for taxpayers who currently are paying the Alternative Minimum Tax than it is for those who are not.  A little time spent making a Roth conversion analysis easily could result in thousands of dollars in tax savings.

 

 

Posted in AMT Planning in General, Calculation of the AMT, Retiree, Salaried, Type of Taxpayer | No Comments »

Exercising Employee Stock Options – Beware of the Alternative Minimum Tax

Saturday, April 2nd, 2011 | Print This Post Print This Post | Email This Post Email This Post

With the stock market having nearly doubled over the past two years, many individuals holding stock options that they received from their employers are giving serious consideration to cashing out the value in these options.  This article discusses the two principal types of options and explains the different AMT issues associated with each.

 

Types of stock options

 

For tax purposes there are two types of stock options – “qualified” and “nonqualified.”  The official term for a qualified option is Incentive Stock Option, commonly referred to as an “ISO.”  Each employer has the discretion, through the design of its plan, as to which type of option it grants to the employee, and it is not uncommon for some employees to have both types.  It is important to note here that it is the responsibility of the individual to understand what he has.

 

Stock option essentials

 

A stock option, like any other option, is a contract giving one person the right to buy property from another person at a predetermined price.  If the underlying property (stock) increases in value, the value of the option correspondingly increases.  If the value of the stock decreases, the option has no value.  Options generally have a fixed term – five to ten years for stock options is common, so the employee must act within this period or the option will lapse.

 

Example – an employee is granted an option to buy 1,000 shares of his employer’s stock at today’s value of $50.  If the stock increases to $60 before the option lapses, the employee can exercise the option, effectively buying the shares from the employer at a discount and, in this example, realizing a $10,000 gain.  To alleviate the hardship of asking the employee to write a check for the $50,000 exercise price, employers commonly arrange with a broker to allow what is referred to as a “cashless” exercise involving a same day sale.  In this situation, on the date of exercise the broker sells an equivalent number of shares, and then sends the employer the $50,000 along with enough to cover the tax withholding requirements.  Then, at the close of the market’s three-day settlement period, the net amount ($10,000 less taxes) is credited to the employee’s account.

 

Tax results from option exercise

 

Nonqualified option – on the date of exercise the $10,000 in the above example is taxable income.  This is ordinary income, not capital gain, just as if it were part of the employee’s salaries and wages.  The $10,000 will be included in taxable income reported in the employee’s W-2 at the end of the year.

 

ISO (qualified option) – The $10,000 will not be taxed as income on the date of exercise.  Instead, it is a tax preference item for purposes of the AMT, meaning that Alternative Minimum Taxable Income will be higher than the employee’s Regular Tax taxable income by $10,000.  The number in this example is relatively small, but if the preference item from an ISO exercise is large enough the employee easily can find himself stuck in the AMT.  If the individual already is in the AMT, the hit from an ISO exercise will make it just that much more painful.

 

Tax planning for option exercises

 

The exercise of a nonqualified option does not have any direct AMT consequences.  As an individual’s taxable income increases, however, the Alternative Minimum Tax exemption is phased out, so testing for the impact of this is important before exercising even a nonqualified option.

 

Especially critical, however, is tax planning before doing an ISO exercise.  In order to exercise an ISO without triggering the Alternative Minimum Tax, the individual has to do the tax calculation under alternative assumptions as to the size of the exercise, as well as consider doing the exercise partially in one year and partially in the next.  By doing this it certainly is possible to minimize the impact of an ISO exercise.  Note also that the employee has a period of time after the exercise within which a sale of the stock will constitute a “disqualifying disposition,” thus negating the AMT effect and retroactively treating the transaction as if it were instead a nonqualifying option.

 

Summary

 

The underlying investment decision as to the right time to cash out of employee stock options must, of course, must be the individual’s primary focus, but if that exercise will bring along with it a big AMT hit taxes need to be considered in deciding how many options to exercise and in what year they are exercised.  That nice chunk of extra income the employee thinks he is getting can be seriously eroded by improper tax planning.

 

Posted in AMT Exemption, AMT Planning in General, Incentive Stock Options Exercised, Salaried, Type of Taxpayer | No Comments »

I Am Retired – Does the AMT Apply to Me?

Thursday, March 17th, 2011 | Print This Post Print This Post | Email This Post Email This Post

Of all the different types of AMT taxpayers, retirees typically are the most surprised when they find themselves stuck in the Alternative Minimum Tax.  Unfortunately, there is no “age exemption” for the AMT – an individual could reach 100 and still be paying it, depending on that person’s level and types of income and tax deductions.  In certain cases, the AMT may even hit a retiree harder than a person still working.  With a little understanding of the issues and some advance planning, retirees may actually be in a better position than others to do something about the AMT.

 

There’s a great story that Eric Solomon, Assistant Secretary of the U.S. Treasury for Tax Policy during the Bush administration, used to tell.  His father had received a letter from the IRS stating that his 2004 tax return could not be processed because he had not computed his Alternative Minimum Tax. “My dad said, ‘I’m 82. I don’t pay the AMT,’” Solomon would recall. Unfortunately, no such octogenarian exemption exists, but Solomon said he had to spend three hours on the phone with his dad working through the Form 6251.

 

This article will address both income issues associated with retirees and the AMT as well as deduction issues.

 

Income issues

 

Retirement plan distributions

 

Individuals have many choices as to how they can take distributions from their retirement plans, whether these plans are in the form of pensions or 401(k)-type plans.  A lump-sum distribution, or some other accelerated form of distribution, more likely would trigger the AMT than choosing a lifetime annuity.  This is because the higher one’s income is in any one year the more likely the AMT exemption is phased out, in turn meaning the more likely the individual is to be in the Alternative Minimum Tax.

 

Stock options- nonqualified

 

Many mid- to upper-level employees who work for a corporation, typically a publicly-traded corporation, receive “nonqualified” stock options as part of their compensation packages.  Many of these option plans allow the individual a certain period of time after retirement to exercise these options.  Similar to the point made above with respect to retirement plans, a retiree must consider the AMT impact when deciding when to exercise these options and how much income will be generated.

 

Stock options – Incentive Stock Options

 

If an individual has Incentive Stock Options, the exercise of these in one year can almost guarantee paying the Alternative Minimum Tax.  This is because the difference between the value of the stock on the date of exercise and the option price is a direct AMT preference item – unlike the indirect effect the exercise of nonqualified stock options can have as discussed above.

 

Capital gains

 

Retirees on occasion may have capital gains that are disproportionately large in comparison to the rest of their income.  These gains may result from distributions from mutual funds, over which the individual has no direct control, or from an effort to diversify an investment that is too concentrated in one stock, or from any number of reasons.  These sudden bumps in income can cause the retiree to lose a portion of his AMT exemption, resulting in a problem similar to those discussed above.

 

Deduction issues

 

Standard deduction

 

A taxpayer may elect to take the “standard deduction” in lieu of itemizing deductions.  The amount of the deduction varies by filing status, but for a couple filing jointly it is $11,600 for 2011.  Since no standard deduction is allowed for the AMT, Alternative Minimum Taxable income – the amount on which the AMT is calculated – will be $11,600 higher than Regular Tax taxable income.  Add to this the extra $2,300 exemption for folks age 65 and over and one can see why more and more retirees are being pulled into the AMT.  Note that an extra amount also is allowed in cases of blindness, further exacerbating the problem for these individuals.

 

Property taxes and state income taxes – changes in state of residence

 

An individual who itemizes deductions generally will get a Regular Tax benefit for property taxes and state income taxes, as well as certain other state and local taxes.  None of these taxes is allowable as a deduction in computing the Alternative Minimum Tax.  Accordingly, like the standard deduction issue discussed above, taxable income on which the AMT is calculated will be higher than Regular Tax taxable income.  If a change in state of residence at retirement is contemplated, it is important to plan for the AMT effects.  Moving from a high state and local tax jurisdiction to a state without income tax like Florida, for example, could mean falling out of the AMT along with a corresponding opportunity to move income, or deductions, from one year to the other to minimize the AMT.

 

Summary

 

A sudden change in one’s income position, as typically happens in the case of retirement, can present significant Alternative Minimum Tax planning opportunities.  Deductions that would be lost in an AMT year may be shifted to a Regular Tax year, and income might be taxed at a lower rate in one year versus the other.  These principles apply to all future retirement years; not just the year of transition from employment to retirement.  While often overlooked, taxes, especially the Alternative Minimum Tax, are a very important part of planning for retirement.

 

Posted in AMT Exemption, AMT Planning in General, Calculation of the AMT, Capital gains & Dividends, Incentive Stock Options Exercised, Retiree, Standard Deduction, State Income & Other Taxes, Type of Taxpayer | 1 Comment »

I Am an Investor – Does the AMT Apply to Me?

Friday, March 4th, 2011 | Print This Post Print This Post | Email This Post Email This Post

Every taxpayer with an investment portfolio of any size definitely needs to be concerned about the Alternative Minimum Tax.  Certain types of investments, and the income earned on those investments, are likely to trigger the AMT.  Most investors also have expenses associated with managing these portfolios, and certain of these expenses also can have an AMT impact.

It should be noted that only investments outside of qualified retirement plans – e.g., those investments not in a 401(k), an IRA or an employer’s retirement plan – are affected by the AMT, so it is these investments that are the focus of this article.

Investment income

Municipal bonds, in particular Private Activity Bonds

Interest earned on municipal bonds is exempt from the Regular Tax.  For the Alternative Minimum Tax, however, certain municipal bonds – those labeled “private activity bonds”- are subject to tax.  These types of bonds are used to support “private activities,” an example of which would be a local government’s development of an industrial park as an inducement for companies to locate in the area.

The concern to the investor is the negative impact that being subject to the AMT has on the bond’s effective yield.  For example, a municipal bond fund in today’s market may be yielding in excess of 4 percent, but if private activity bonds are a part of that fund’s portfolio, more than a quarter of the yield on this part can be lost due to the AMT.  That 4 percent quickly drops to a net-after-tax 3 percent yield!

Partnership investments

For an individual investing in a partnership, after the close of the year a tax form known as a “K-1” will be received.  Because the partnership is a pass-through entity for tax purposes, this form tells each partner what income or losses to report on his or her individual tax return.

On the Form K-1 there also is a box labeled “Alternative Minimum Tax (AMT) Items.”  If the partnership itself has any AMT items, they pass through and are reported by the individual partners just as the income or losses are.  It is fairly common for investment partnerships to have activities that generate AMT items, so investors should consider inquiring about this when initially evaluating the investment.  Here again, the anticipated yield can be reduced significantly if the AMT has to be paid.

Capital gains

Long-term capital gains are a bit of a sleeper issue with regard to the Alternative Minimum Tax.  Although officially they are taxed at the same tax rate for purposes of the AMT as they are for the Regular Tax (currently 15 percent), and they are not a specifically-identified AMT item, nonetheless they can have a significant impact on an individual’s Alternative Minimum Tax.  The reason for this is the fact that, as taxable income increases, the AMT exemption amount is gradually phased out.  Since capital gains are included in taxable income, that 15 percent Regular Tax rate easily creeps closer to a 20 percent rate when figuring the AMT.  This is especially important for those folks already in the phaseout income range ($150,000 to $440,000 for marrieds filing jointly; varies by filing status).

Investment expenses

Investment interest expense

If money is borrowed for the purpose of making investments, in general the interest paid on the debt is computed the same for the Alternative Minimum Tax as it is for the Regular Tax.  There are two exceptions, however.  One is if home equity indebtedness is used to acquire investment property.  This type of interest is first disallowed for the AMT because it is not considered “qualified residence interest,” but when used for investing it generally is considered an allowable deduction for the AMT.  The other exception is for interest on debt the proceeds of which were used to acquire private activity bonds.  Because this interest is disallowed for purposes of the Regular Tax under the rules that disallow interest if loan proceeds are used to acquire municipal bonds, the interest expense related to the private activity bonds is an allowable deductible for the AMT.

Investment interest income

Investment interest expense is an allowable deduction, but only to the extent the taxpayer has investment interest income.  For purposes of the AMT, investment income is computed somewhat differently than it is for the Regular Tax.  For example, if an individual has private activity bond interest, this is included in AMT investment income because it is taxable for the AMT.  Another example applies to taxpayers who have rental properties, where the Regular Tax-AMT differences in computing depreciation will result in a difference in investment income, thus affecting the amount of investment interest expense that may be deducted.

Other investment expenses

Investment-related expenses such as fees paid to an investment advisor, trust fees, safe-deposit box fees, etc. and any other expenses incurred in deriving income may be deducted for the Regular Tax, subject to certain limitations that apply.  The AMT allows no deduction for these expenses, however, so this item may factor into an individual’s Alternative Minimum Tax computation.

Summary

Taxpayers with an investment portfolio easily can find themselves caught in a number of traps set by the Alternative Minimum Tax.  But as the individual has total control over the investments made, these traps generally can be avoided with a little advance planning.  For investors currently stuck in the AMT, a review of the items triggering this tax will allow the individual to consider rearranging the portfolio to lessen this AMT impact.  The thing always to keep in mind is the simple fact that it is only the after tax yield that ends up in the individual investor’s bank account!

Posted in AMT Planning in General, Capital gains & Dividends, Investment Interest Expense, Investor, K-1 / All other AMT Items, Misc Deductions 2-percent Floor, Private Activity Bonds, Type of Taxpayer | No Comments »

AMT and estimated taxes – 1st quarter payments due next week

Friday, April 10th, 2009 | Print This Post Print This Post | Email This Post Email This Post

It’s common knowledge that we have to pay our taxes as we earn our income. For employees, taxes are withheld from each paycheck, while self-employed folks are required to make quarterly estimated tax payments. But what about the AMT?

Not-so-common knowledge is that the AMT also must be paid throughout the year – if you wait until April 15, 2010 to pay your 2009 AMT, you could be subject to significant underpayment penalties.

Employees – the withholding tables your employer uses do not include any estimate for the AMT. If you want this withheld, you have to make the computation yourself and request an additional amount withheld from each paycheck. With only 9 months left in the year, you already have some catching up to do.

Self-employeds – your quarterly estimates must include your expected AMT liability. With 1st quarter estimates due next Wednesday, April 15, you have some quick calculating to do to avoid risking an underpayment penalty.

How do you know whether you will be paying the AMT in 2009? Some use the “same as last year” approach, but this is inexact and carries the underpayment risk. You can forecast your income and expenses for the year and then do an AMT calculation based on this forecast, or you can use an “annualization” approach. IRS Form 1040-ES, available on their web site, walks you through the steps involved.

Posted in Estimated Taxes and the AMT, Type of Taxpayer | No Comments »