I did a couple of searchers on this topic could not find anything. So my appologies if this has been discussed elsewhere.
Since there are many people here who are focused on Finances and some/many who seem to have done well for them selves, I figure this topic must be important to a lot of you.
I recently asked my accountant to do a projection on my (US) taxes for 2005 and he has infomed me that I will have to pay AMT for 2005. However he nor anyone else is able to explain to me (to my satisfaction) how one gets into this exclusive club (cynical smirk), what exactly it means (other than pay more to uncle Sam) and how if any way exists to (legit) reduce this additional tax burden.
Every year I have had deductions taken away, and now I am told I cant even get a full right off on my mortgage interest and property taxes.
Have your accountant give you the Form 6251 that he prepared in order to determine that you were subject to AMT. The 6251 is the form that calculates your AMT income. You will see which itemized deductions are being added back for AMT purposes. Unfortunately, AMT is grabbing more and more people who are not wealthy but are making 100-200K per year. The problem with AMT is that it has not been indexed for inflation since it started back in the 70's, I believe.
I've read that if you're in the middle class, live in a high tax state (state income tax plus property tax), have kids then by the year 2010 you can expect to be paying 1000s in excess taxes unless the AMT law is changed. HELOC interest also won't count as a deduction if it wasn't used on the house. Some muni bonds are taxable under AMT. Depreciation is calculated differently for AMT (not to our benefit). Everyone complain to your congressmen or you will be stuck paying it soon. I've paid it the last 2 years and I don't have any loopholes or stock options. It's a ripoff.
Increase your regular taxable income by bringing forward any unrecognized gains like in stocks, deferred interest income, variable commission income, etc., and deferring deductions by making Dec payments in Jan. This works if your regular income tax rate is greater than your flat AMT tax rate. By raising regular income, the AMT tax amount grows more slowly than your regular income tax amount getting you out of AMT. This does not reduce your total tax bill, it only gets you out of AMT.
What state were you from? If you come from CA or NY, you have a much higher chance of paying AMT.
Also, adding more income does not mean you can reduce your AMT. Because the AMT exemption is erased as your income increase and it is actually running at a faster pace that regular income tax. Use a tax software like TurboTax to help you figure that out.
fboyfboy said:What state were you from? If you come from CA or NY, you have a much higher chance of paying AMT.
Also, adding more income does not mean you can reduce your AMT. Because the AMT exemption is erased as your income increase and it is actually running at a faster pace that regular income tax. Use a tax software like TurboTax to help you figure that out.
Actually, when you increase income, you are also increasing the amount of regular tax and often times that will exceed the AMT.
In our CPA practice, the only clients that are subject to AMT are the ones in the $100-300k income range. Clients making over $1 million almost never pay AMT. At that income level, you lose most of your itemized deductions anyway and your regular tax exceeds AMT.
AMT is taxed at 26% or 28%. By the time someone hit it, it is most likely 28%. You can look up the tax rate table to find out when the income tax rate exceed 28%. By the time you hit the 33% mark, there is a lot of catch up to do. AMT exemption will be erased faster than income tax owed. More income also means more state tax which is not deductible in AMT => widening the gap. I would say for someone just starting to pay AMT, he has to bring in $100K of income to offset the AMT.
Simply put, it is not likely someone can casually raise his income to dodge AMT. Everyone's situation is unique. Like I said, use a tax software like TurboTax to help you figure that out.
Ok here is the biggest AMT loophole I know of. Buy a house with a mortgage and deduct the interest. Let's say you own a $500,000 house with a $150,000 mortgage that was used to purchase your home. The interest on that mortgage is deductible under the AMT. If you did a cash out refi and got a $400,000 mortgage, the mortgage interest on the additional $250,000 would not be tax deductible under the AMT. However, if you sold your home and bought a new $500,000 house, you could take a $400,000 mortgage out and that would be deductible. You could then invest the proceeds in Savings bonds or tax free bonds. Obviously you'd have to qualify for the larger mortgage and there are significant expenses involved in buying and selling houses, but if you're on the fence about buying a new house and expect to owe the AMT, this might make your decision a little easier. Tax laws do change, but if no action is taken by Congress and the President, the AMT deduction will go down significantly next year and many more people will be swept up by it. I'm preparing as if it won't change and plan to bunch my charitable deductions into next year and increase contributions to my wife's 401k(two other important ways to dodge the AMT)
Again, it depends on which state you live in. If you live in CA and bought a home at $200K 10 years ago, you will be paying property tax on about $250K. If you buy a home for $500K, you will be paying twice the property tax. And guess what? Property tax is not deductible in AMT.
So, always use a tax software like TurboTax to help you figure that out
Again, it depends on which state you live in. If you live in CA and bought a home at $200K 10 years ago, you will be paying property tax on about $250K. If you buy a home for $500K, you will be paying twice the property tax. And guess what? Property tax is not deductible in AMT.
So, always use a tax software like TurboTax to help you figure that out
It really doesn't depend on what state you live in for the AMT. The example I used was for avoiding the AMT, not for solving the quirks of California's property tax system. I don't think there's tax software on the market to help you out with that.
I live in the sucky state of NJ. Where we pay and we pay and keep voting corrupt politicians into power.
I was told the amount I could deduct of my mortgage interest and my property taxes would also go down because now I am in AMT. This thing is just confusing as all hell. I guess the only way to deal with this is to run some scenario's using a tax prep software.
Thanx folks for all the data and the links. I am in the process of switching jobs so my 401k shelter is unavailable for about 1 year which is how long you have to wait with my new company before I can contribute. Cant do Roth, cant do an IRA, cant deduct anything. The only way out I can see is to launch a real legit business. Not a bad thing to do really.
So here's me up the AMT river with (almost) no paddle. I guess there are much worse places I could be. I am thankful for what I have, just want to minimize the waste. Thats all.
If you're right on the borderline of the AMT and you think you can escape it next year by contributing to a 401(k), you could try accelerating AMT deductions into this year, ie charitable deductions, January's mortgage payment, and see how that affects your tax projections.
Be careful in using tax software in predicting next year's AMT amount, however, since the AMT exemption amount is scheduled to go down dramactically and your software won't take that into account. You may want to wait until later in the year to accelerate any such deductions as the law could change during this year for next year and you may want those deductions for next year depending on your tax situation.
Yup, that's the ticket. Also read the earlier thread listed by dcwilbur.
For those who have not yet reached the AMT floor on their income taxes (from which there is virtually no escape), there is a strategy I have been using to delay the inevitable.
I'd like to correct one misperception. If you pay AMT, most advisors say that you should accelerate income to take advantage of the lower tax rate. This advice is almost always wrong: from $150k to $300k in gross income the AMT liability gets larger as income increases. This increase is due to the phase-out of the AMT credit which multiplies your supposed low AMT rate by 1.25. Not to mention the fact that you will pay 100% of the state income tax rather than some 70% if you pay it in a non-AMT year.
Bottom line: if you will owe AMT try to move state and local tax payments to another year, up to the point where your AMT just reaches zero. Do not accelerate income unless you run the numbers, and consider deferring income if you have that option.
If you will not owe AMT, consider accelerating state and local tax payments to reduce the chance that the AMT will bite you in the following year. The "tax you never heard of" thread explains this further. The point is that the AMT only leaves so much room for deductible state or local taxes, and you really should use 99% of it if you can rather than leave some of it on the table. If you "bank" some of these deductions in 2003, you will have that much more room in 2004.
Again, it depends on which state you live in. If you live in CA and bought a home at $200K 10 years ago, you will be paying property tax on about $250K. If you buy a home for $500K, you will be paying twice the property tax. And guess what? Property tax is not deductible in AMT.
So, always use a tax software like TurboTax to help you figure that out
It really doesn't depend on what state you live in for the AMT. The example I used was for avoiding the AMT, not for solving the quirks of California's property tax system. I don't think there's tax software on the market to help you out with that.
slimcustomer said: It really doesn't depend on what state you live in for the AMT. The example I used was for avoiding the AMT, not for solving the quirks of California's property tax system. I don't think there's tax software on the market to help you out with that.
Of course it matters what state you live in. State income taxes are non-deductible for the AMT tax. So if you live in a high state income tax state (e.g. CA or NY) opposed to a low tax state like (e.g. WA, NV or FL) then you will pay more AMT taxes. It is not a CA quirk. Also, the fewer the deductions the more of the AMT exemptions you lose.
slimcustomer said: Tax laws do change, but if no action is taken by Congress and the President, the AMT deduction will go down significantly next year and many more people will be swept up by it.
Slimcustomer: I am in total agreement with you. Soon, all of us will be paying the AMT tax. Where did you see that the exemption will be going down? I had thought it was fixed (but in terms of 2005 dollars it would be going down due to inflation).
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I guess there are much worse places I could be. I am thankful for what I have, just want to minimize the waste. Thats all. 
