The Alternative Minimum Tax is a major part of the federal tax structure. It runs parallel, but separate, from our standard tax system. The AMT increases the amount of tax assessed by disallowing many tax deductions and including items that are generally tax-free.
Two things strongly factor into the formula for the AMT. One is the type of investments you have. Some investments figure more consequentially in the AMT. Therefore, the structure of your portfolio is very important in determining how much or how little the Alternative Minimum Tax will affect you. The second factor is, of course, the amount of your investment.
Investors earn income on dividends, interest, capital gains, partnership, or real estate investments. This income is variable depending on the amount of cash, bonds, stock, and other investments in your portfolio. There are things that can be done to soften the impact of the AMT.
Try and adjust the timing of certain income factors such as implementing stock options and selling stock. Controlling the timing of income and the amount of income can drastically affect the AMT.
While it is true that you cannot change the timing of interest income, an investor could, conceivably, change the amount of dividend income earned by changing the strategy of investing. Please note that some income that is not taxable under regular taxes is taxable under the AMT.
Seriously consider your state and local tax load. State taxes play a large role in determining Alternative Minimum Tax because under the AMT, state taxes are not deductible. Some states like New York, Massachusetts, and California have particularly high taxes. Other states, like Texas, Nevada, and Florida have lower taxes. Living in a state with lower taxes will help you to more easily avoid the Alternative Minimum Tax.
If you are an employee and you can defer the payment of bonus monies from one year to the next, this will definitely help you with the Alternative Minimum Tax. The more standard income, from salary or hourly wages, an individual has, the more they will be pulled away from the Alternative Minimum Tax. Some employees are paid a commission along with their other forms of income. Commission income should be studied to determine if it could be timed in a fashion to aid in planning for the Alternative Minimum Tax.
Some employee business expenses can affect the Alternative Minimum Tax. Before accepting any employer reimbursements, figure out how it will affect you in regard to the AMT. Perhaps you and your employer might work out an alternative.
Capital gains can seriously impact your AMT exemption. Always consider the implications of the AMT before you decide to realize any capital gains.
The alternative minimum tax affects most of the taxpayers. It tries to catch people who are trying to escape the tax obligations under various tactics. But then you can produce the effect of AMT with some effective strategies. Do you know some of them? Chintamani Abhyankar provides useful tips.