Alternative Minimum Tax (AMT)
According to Investopedia.com the “alternative minimum tax (AMT) recalculates income tax after adding certain tax preference items back into the adjusted gross income. AMT uses a separate set of rules to calculate taxable income after allowed deductions. Preferential deductions are added back into the taxpayer’s income to calculate one’s alternative minimum taxable income (AMTI), then the AMT exemption is subtracted to determine the final taxable figure.” Sounds simple enough, right?
This parallel tax system is a method for the IRS to impose additional tax for “high income earners”. What originally was only to impact a small group of people now effects a large amount of the population. Typically, large families with high incomes are adversely impacted by the AMT because certain deductions that they most often take advantage of are disallowed when calculating the AMT.
In an effort to avoid the AMT, you should look to reduce your Adjusted Gross Income (AGI). Click here for a tax guide that demonstrates the Exemptions and Phaseout Limits based on how you file. If you have an after-tax investment account, structuring your investments so that income produced by dividends and interest are reduced or deferred. Buying tax-exempt bonds or bond mutual funds is a method of decreasing their taxable income produced from your investments that is used to determine your AGI. Another step I would encourage is increasing 401k contributions. Not only does this option reduce your AMT exposure but it also makes sure that you are maxing out your retirement savings. If available, take advantage of a Flexible Spending Account (FSA). If your employer makes this available you could make pre-tax contributions to an FSA. Doing so creates a pool of funds available to be spent on a pre-tax basis throughout the year for medical related expenses. There are some limits and issues related to FSA’s but could be helpful to reduce your reported income as well as set aside funds specifically for medical expenses. Be sure to consult your Human Resources director for help and more information. Lastly, you could consider buying up more life insurance offered on a pretax basis through your employers’ cafeteria plans.
For more information on how much life insurance you should have watch the video below:
If you are affected by the AMT, I would recommend that you consult with your tax advisor on some of these options discussed to see what is available to you and how it might reduce your income. For any other financial planning needs please don’t hesitate to contact us.