The dreaded surprise tax: What you need to know about Alternative Minimum Tax
By Tony Constantine, CPA, Ciuni & Panichi, Inc. Partner, Tax
AMT… those three little letters cause almost as much fear and trepidation as the other three letters… IRS! Alternative Minimum Tax (AMT) just sounds scary, and for those facing it for the first time it can be. You find the benefit that you count on from your itemized deductions wiped away and an increased (and often unexpected) tax liability. It is important to understand what AMT is and if you are subject to it now, before you file your 2016 return. If you are, there are steps you can consider taking before year end to minimize potential liability.
The AMT was established to ensure that high-income individuals pay at least a minimum tax, even if they have many large deductions that significantly reduce their “regular” income tax. If your AMT liability is greater than your regular income tax liability, you must pay the difference as AMT, in addition to the regular tax.
AMT rates begin at 26 percent and rise to 28 percent at higher income levels. The maximum rate is lower than the maximum income tax rate of 39.6 percent, but far fewer deductions are allowed, so the AMT could end up taking a bigger tax bite. For instance, you can’t deduct state and local income or sales taxes, property taxes, miscellaneous itemized deductions subject to the two percent floor, or home equity loan interest on debt not used for home improvements. You also can’t take personal exemptions for yourself or your dependents, or the standard deduction if you don’t itemize your deductions.
Steps to consider
Fortunately, you may be able to take steps to minimize your AMT liability, including:
Timing capital gains – The AMT exemption (an amount you can deduct in calculating AMT liability) phases out based on income, so realizing capital gains could cause you to lose part or all of the exemption. If it looks like you could be subject to the AMT this year, you might want to delay sales of highly appreciated assets until next year (if you don’t expect to be subject to the AMT then) or use an installment sale to spread the gains (and potential AMT liability) over multiple years.
Timing deductible expenses – Try to time the payment of expenses that are deductible for regular tax purposes but not AMT purposes for years in which you don’t anticipate AMT liability. Otherwise, you’ll gain no tax benefit from those deductions. If you’re on the threshold of AMT liability this year, you might want to consider delaying state tax payments, as long as the late-payment penalty won’t exceed the tax savings from staying under the AMT threshold.
Investing in the “right” bonds – Interest on tax-exempt bonds issued for public activities (for example, schools and roads) is exempt from the AMT. You may want to convert bonds issued for private activities (for example, sports stadiums), which generally don’t enjoy the AMT interest exemption.
Failing to plan for the AMT can lead to unexpected — and undesirable — tax consequences. Please contact Ciuni & Panichi’s Tony Constantine, CPA, Partner, Tax, at 216-831-7171 or firstname.lastname@example.org for help assessing your risk now, and to plan and implement the appropriate strategies for your situation.
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