Don’t Let the AMT (Alternative Minimum Tax) Sneak Up On You

The alternative minimum tax (AMT) is often called a “stealth tax” because it sneaks up on unsuspecting taxpayers. But you can keep from being caught if you take timely year-end action.

Begin with understanding how AMT works. The Alternative Minimum Tax requires a separate computation on your tax return. You start with regular taxable income, then add back certain itemized deductions and “tax preference items.”

Example: The itemized deduction for state and local income taxes is an AMT adjustment. The amount you claim for these taxes when figuring your regular taxable income is not allowed for the AMT calculation.

Next, you subtract an exemption based on your filing status. For 2015, the AMT exemption starts at $83,400 when you’re married filing jointly and $53,600 when you’re single.

The final step is to apply the AMT tax rate to the result. For 2015, the AMT rate is 26% on income up to $185,400 for all filing statuses except married filing separately (the married filing separate threshold is $92,700). The AMT rate is 28% on amounts above the threshold.

If your Alternative Minimum Tax liability exceeds your regular tax liability, the difference is added to your regular tax. Otherwise, you pay your regular tax bill.

Planning moves include:

  • Seek employer reimbursement for employee business expenses. Unreimbursed expenses are included in miscellaneous deductions that are added back to AMT income.
  • Check state income tax withholding to ensure you’re not overpaying. This way, you can keep your state and local income tax deduction as low as possible.
  • Don’t prepay property taxes. Real estate tax is not deductible for the AMT calculation.
  • Avoid tax preference items such as the bargain element of incentive stock options.

Coordinating Alternative Minimum Tax planning with your overall year-end tax plan gives you the best opportunity to stay ahead of this tax. Give us a call at 817.488.8939 for help.

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