AMT TAX PLANNING AND FAQ

AMT TAX PLANNING AND FAQ

Without legislative relief from the scheduled reduction in the AMT exemption, millions of taxpayers will be facing higher federal tax bills for 2006. For the last number of years, Congress has seen fit to enact a temporary fix to the AMT in the form of a higher AMT exemption. This temporary fix ends at the end of this year. Without further legislation, the exemption will revert from $58,000 for couples married filing jointly and $40,250 for single/head of household filers to $45,000 and $33,750 respectively. Certain legislators have discussed extending the higher exemption amount, but each year the fix becomes more costly and fiscally difficult to accomplish. For more information on this topic, please read this DEC 4th NYTIMES article entitled," Hmmm. What's This Alternative Tax? Hey, Wait! Ouch! ". Also please see, " It Could Happen to You".

For more on the AMT from Fatwallet, please see the following:
AMT Alternate Minimum Tax - Details / Ideas on how to reduce it
In a high income tax bracket? Worried about amt? Don't prepay that mortgage! Buy municipal bonds.
Warning: mortgage refi and AMT
Alternative Minimum Tax (AMT): What triggers it?
AMT and home equity loans Tax time - AMT-free Bond funds
AMT implications on exercise of unvested ISO options
Preparing for the income tax you never heard of (AMT)
alternative minimum tax (AMT) any tips on avoiding this?
Stay out of the AMT later by pre-paying state taxes now!

For more on other end of the year federal income tax strategies, please see lonestarguy's excellent thread, Some year-end tax strategies for reducing federal tax liability

EDIT: Updated title.

Great thread for the AMT replated topics.
We should have a sticky for this thread.

Thanks and green to you.

Dipsi said: I have read many suggestions on how to get away from AMT: increase your income and delay your deductions.
While this may actually eliminate your AMT liability, wouldn't this ultimately increase your total tax payment? Becuase even with AMT, your total tax could be less than if you do what they suggested above w/o AMT.

Some strategies to avoid AMT are defective for this reason. Moving tax payments from one year to another are generally not defective if you run the numbers first. The AMT creates a floor for your tax liability. This floor is called your Tentative Minimum Tax, or TMT. Some people confuse things by using AMT when they really mean TMT. Technically, the AMT is the amount by which your TMT (floor) exceeds your regular tax.

The TMT floor that can only be lowered by mortgage interest, charitable contributions, and a few other factors that will not likely apply to you. All other regular tax deductions are "preferences" not applicable to the TMT floor.

Since the AMT is the excess of the TMT floor over the regular tax, some people try to reduce their AMT by increasing their regular tax. As you note, this is counterproductive unless you simultaneously decrease the tax you pay in a future year.

Shifting state and local tax payments has the greatest potential for benefit. You can minimize your taxes by paying just enough of these in each year to bring your regular taxes down to the TMT floor. Any more and you are wasting some of the deduction. Any less and you are leaving some of your AMT "cushion" on the table. That AMT cushion tends to decrease every year as the regular tax brackets index upward, so you don't want to waste it. I haven't wasted any for the last 10 years or more.

For the most clear and complete discussion of AMT, see http://fairmark.com/amt/index.htm

The 414 to 4 vote indicates that regardless of politics on other issues, the end result will be an extension of the AMT credit for 2006 at slightly above the 2005 level. Too bad the phaseout levels have never been indexed.

There will be AMT relief for 2006. The fight is over whether to provide it in addition to or instead of other tax relief. The Democrats have been outmaneuvered and will likely lose this battle. They won't be able to explain to voters filibustering a stand-alone AMT relief bill.

The voters don't know or care about the fact one bill is filibuster-proof and capped in size but the other bill is not. They'll just see that Senator X voted to filibuster a single-subject bill that would have saved them $3000 of totally unfair tax. It's a no-brainer.

I predict that AMT relief will be handled on a stand-alone basis every year from now on until we get major tax reform, and that the extension will get 350+ votes in the House and 80+ votes in the Senate every time.

Despite annual extensions of the AMT exemption, the AGI threshold for phaseout of that exemption has not been raised since it was established 20 years ago. Now you only need to be slightly affluent to pass that level and start paying an extra 6.5% marginal rate (25% phaseout ratio times the 26% AMT rate). The lack of indexation of this threshold and the similar child credit phaseout threshold combine to create significant annual tax increases that Congress does not have to vote on.

The House and Senate were unwilling to agree to pass AMT relief before they went into recess. Any extension of relief from the AMT for 2006 will have to be passed retroactively next year.

The IRS has an AMT Assistant that will help you determine if you are subject to AMT for 2005.

It takes your financial info (anonymously) and determines whether or not you are subject to the AMT. It doesn't tell how hard you will get hit, it just lets you know whether or not you will get hit.

From today's WSJ in an article entitled, "Bush's Budget Proposal Calls for Permanent Tax Cuts" by Rob Wells:


The Bush administration is proposing $20.5 billion in alternative minimum tax relief for individuals in the 2007 fiscal year. This is significant since last year's budget didn't include a separate provision for AMT relief. The White House said last year it was holding off on AMT relief, pending results of the tax reform panel study. The inclusion of AMT relief this year "may be a recognition that tax reform is not going to get done or the chances of tax reform have diminished significantly," Mr. Jenner said.

The budget said this AMT relief doesn't apply to the child credit, the new saver credit, the earned-income credit or the adoption credit. These tax credits were provided AMT relief until 2011 under the 2001 tax cut, the budget said.

Congress failed to index the AMT to inflation, and so it is capturing an increasing number of middle income taxpayers in high-tax states such as New York, California and New Jersey. Unless Congress acts this year, an estimated 19 million additional taxpayers will be subject to the AMT.

According to the Congressional Budget Office, the AMT is projected to affect four million taxpayers in 2005 and 33 million by 2016.


Those who claim the child tax credit currently under the AMT system should be particularly troubled by the President's apparent lack of support for extending AMT relief as detailed above.

Links to a few headlines -
Tax cut package includes AMT relief
What the tax bill means for your return .

AMT relief finally seems like it is in the cards for 2006. When will work on AMT relief for 2007 start?