AMT planning strategies for high
As high-income taxpayers, it's important to consider the alternative minimum tax (AMT) when planning for taxes. The AMT is a separate tax system that was designed to ensure that high-income taxpayers do not take advantage of too many tax deductions and credits.
In this article, we will explore some AMT planning strategies that high-income taxpayers can use to minimize their tax liability.
1. Minimize Taxable Income
One of the easiest ways to minimize the impact of the AMT is to minimize your taxable income. This can be achieved by deferring income to a future year or accelerating deductions to the current year to reduce your taxable income.
Some common strategies include:
- Deferring bonuses, stock options, or other compensation until the next year.
- Delaying the sale of appreciated assets until the next year.
- Accelerating charitable donations, mortgage interest payments, and state and local tax payments to reduce taxable income.
By minimizing your taxable income, you can potentially reduce the amount of AMT you owe.
2. Take Advantage of Tax Credits
The AMT does not allow for many tax credits, but there are a few that can still be used to reduce your tax liability. For example, the foreign tax credit, the child tax credit, and the credit for the elderly or disabled are still allowed under the AMT.
If you qualify for any of these tax credits, it's important to take advantage of them to reduce your tax liability.
3. Maximize AMT Exemptions
The AMT has exemptions that are adjusted annually for inflation. For 2021, the exemption for married taxpayers filing jointly is $114,600, and $73,600 for single taxpayers.
One way to maximize your AMT exemptions is to reduce your taxable income, as mentioned earlier. Another way is to take advantage of certain deductions that are still allowed under the AMT, such as:
- Medical and dental expenses that exceed 7.5% of your adjusted gross income (AGI).
- Investment interest expenses.
- Qualified electric vehicle credit.
By maxing out your AMT exemptions, you can reduce the amount of taxes you owe.
4. Convert Traditional IRA to Roth IRA
Traditional IRAs are subject to the AMT, but Roth IRAs are not. By converting your traditional IRA to a Roth IRA, you can potentially reduce your AMT liability.
However, it's important to note that the conversion will trigger a taxable event, and you'll have to pay taxes on the amount converted.
5. Consider Tax-Exempt Investments
Investments in tax-exempt bonds, mutual funds, and exchange-traded funds (ETFs) can be a good way to reduce your taxable income and potential AMT liability.
Tax-exempt investments are not subject to federal income tax, and sometimes not subject to state and local taxes as well.
6. Time Capital Gain Distributions
High-income taxpayers who invest in mutual funds may receive capital gain distributions, which are typically subject to the AMT. One way to reduce your AMT liability is to time your capital gain distributions.
For example, if you know that a mutual fund is planning to distribute capital gains in December, you can sell the fund before the distribution date to avoid the AMT.
Conclusion
The AMT is a complex tax system that can be challenging to navigate. However, by implementing some of the strategies mentioned above, high-income taxpayers can potentially reduce their AMT liability and minimize their overall tax burden.
It's important to consult with a tax professional to determine which AMT planning strategies are appropriate for your specific situation. With careful planning and implementation, you can potentially save thousands of dollars in taxes.