March 3, 2014

Alternative Minimum Tax

What is AMT?

AMT is a parallel income tax system to the more familiar “regular” federal income tax system.  It  uses a separate set of rules to calculate taxable income, which is subject to a separate set of tax rates.  The taxpayer (individuals, corporations, estates, and trusts) pays the higher of regular tax or AMT tax.

What are the most common factors subjecting individuals to AMT?

  • High State Income Taxes (in states such as CA and NY)
  • High Miscellaneous Itemized Deductions (typically investment fees)
  • Exercise and Holding of Incentive Stock Options (ISO)
  • Low Ordinary Income

What are the AMT tax rates?

The maximum AMT rate is 28% versus 39.6% under the regular tax system. The preferential long term capital gains rates remain the same under the AMT and regular tax systems.

Will AMT affect me?

Several factors make it difficult to pinpoint who will and will not be affected.  However, as a general guideline, if you live in a high-taxed state such as California  and have income in the $200k/$250k and upward range, chances are good that you will be subject to AMT.  Individuals with high ordinary income (i.e. salary and guaranteed payments) in the $1M+ range may escape AMT, but are then subject to the highest tax bracket of 39.6%

How can I plan for AMT?

There are various strategies to minimize your overall tax burden, given these two parallel tax systems. For example, we may want to consider the timing of state tax payments or real estate taxes or employing stock option strategies. In addition, we would work closely with investment advisors to ensure that they are aware of a client’s tax situation so that they can maximize after-tax returns.

We are happy to discuss strategies applicable to your personal situation.  Please do not hesitate to reach out to us with any questions.