As you know, the alternative minimum tax (AMT) system was originally enacted to ensure that all taxpayers, particularly higher-income taxpayers, pay at least a minimum amount of federal income tax. The AMT generally imposes a minimum tax on taxpayers who have substantially lowered their regular tax liability by taking advantage of tax-favored and preference items, including deductions, exemptions, and credits.
In recent years, a growing number of middle income taxpayers were affected by the AMT. However, since the AMT exemption amounts are now indexed for inflation, many middle-income taxpayers are no longer impacted. For those taxpayers who remain subject to the AMT, the permanent indexing provides some certainty for planning purposes.
Depending on the amount of your "taxable excess," AMT rates ranging from 26 to 28 percent may be imposed on tax preference and adjustment items. In view of the serious risk of AMT exposure, careful planning to reduce your overall tax bill is critical.
Although the AMT is a significant concern, tax planning should not focus solely on eliminating AMT liability. Due to the complexity of the interrelationship of the AMT and regular tax systems, concentration on lowering minimum tax liability alone could easily result in an unwanted increase in your regular income tax liability.
In general, the best way to handle AMT liability is careful planning involving the coordination of future regular income tax and AMT, using accurate projections of income, expenses, and deductions over multiple years with several alternative scenarios. An overall plan must then be devised to manage your AMT liability without raising regular tax liability.
We believe that a thorough analysis of your current and projected tax situation could minimize or eliminate your exposure to AMT liability. Please contact our office to make an appointment to discuss this important tax planning opportunity.