The IRS recently released its 2011 version of the Form 6251 – Alternative Minimum Tax – Individuals. With year-end only a few months away, this serves as a timely reminder that anyone stuck in the AMT needs to start thinking about the ways they can reduce this burden. The most effective AMT planning strategies must be implemented by December 31 in order to have any impact on the current year’s taxes. This article provides a general overview of some of the more important of these planning strategies.
AMT exemption amount
Late last year Congress once again adjusted the AMT exemption amount for inflation - for 2011 it is $74,450 for married couples filing a joint income tax return and $48,450 for singles. While Congress hasn’t even started thinking about the “patch” that will be needed again on January 1, 2012, we can guess that at some point that will be taken care of.
Phaseout of the exemption
For taxpayers whose incomes reach a certain level, the exemption is gradually phased out. This phaseout is at the rate of $1 of exemption lost for every $4 of income above the threshold. For 2011 the threshold for marrieds filing jointly is $150,000, and for singles it is $112,500. If a couple’s income is $160,000, for example, the exemption is reduced by $2,500. If the couple’s taxable income reaches $447,800, the exemption is zero.
Capital gains and dividends
While capital losses may be more typical these days due to the stock market’s wild gyrations, it’s important to note the AMT impact that results from capital gains as well as dividend income. These sources of income are taxed at the same 15% rate for both the AMT as well as the Regular Tax, but there is a direct impact on an individual’s AMT burden because of the exemption phaseout discussed above. For example, a $10,000 capital gain by itself can result in $700 of AMT being paid (loss of $2,500 of exemption times the marginal AMT rate of 28%).
Itemized deductions – state and local income taxes
The one item that affects the greatest majority of folks stuck in the Alternative Minimum Tax is the itemized deduction for state and local income taxes. While allowable for the Regular Tax, this deduction is disallowed in its entirely for the AMT. For taxpayers who expect to be in the AMT for 2011, serious consideration should be given to postponing payment of some portion of these taxes into 2012. If the taxpayer is not in the AMT in 2012, real tax dollars can be saved that otherwise would have been “wasted” by not ding this basic planning.
Itemized deductions – property taxes
The next biggest item in terms of AMT exposure is property taxes which, similar to state and local income taxes, are not deductible in computing the Alternative Minimum Tax. Many taxpayers receive their property tax bills in the fall, with a period of months before the taxes are actually due. Just as with the state income tax planning mentioned above, taxpayers currently in the AMT might be better off pushing the payment of these property taxes into 2012.
Other AMT items
There are quite a few other AMT items in addition to those mentioned above. Some of these items are deductions from income that are allowed for Regular Tax purposes but not allowed for the AMT, while others are certain types of income that are treated differently for the Alternative Minimum Tax. The Form 6251, available on the IRS’ web site, serves as a list of all of these items. Taking a look at last year’s tax return serves as a great starting point to see which items are likely to affect the taxpayer again this year.
The value of planning
The average amount of AMT paid by each taxpayer caught in its tentacles is over $5,000. Just a little bit of time spent on basic tax planning can result in some significant amounts being saved!