The AMT is a parallel tax system that operates in the shadow of the regular tax. Before we can examine this tax system we must first take a look at the history behind it.
Why does the AMT exist?
In 1969, the Secretary of the Treasury noticed a small number of people with high incomes legally using deductions and other tax breaks to reduce their taxable income significantly and benefit from paying little to no tax. Their $200,000 income was not subject to income tax due to deductions and credits available. To keep high income taxpayers from avoiding tax, Congress enacted the AMT. This stirred quite a controversy amount taxpayers some stating this enactment to be unfair. One of the controversies subsided after exemptions for the AMT were indexed for inflation. As of today, Congress enacted a permanent fix to index income subject to AMT for inflation. According to the Tax Policy Center, the AMT brought in $30 billion in revenues past year. How can we then plan ahead to avoid being hit by this monstrosity?
Tax planning tips for the AMT
Here are some tips on paying less tax.
Max out your retirement contributions. If you are on the threshold for AMT then stuff more of your income into your retirement funds. Contributions to Roth funds are after-tax and depending on your tax bracket you may benefit by the AMT. For example, if you’re in the 39.6% tax bracket then by converting your traditional IRA to a Roth IRA while being subject to the AMT would drop you to a 28% tax bracket giving your tax savings. Also, be careful of the muni bonds because some of them fall into the AMT snare even though they are not taxable in some cases.
Be aware of your AMT income limits. If you’re on that threshold it may not benefit you to pay off your property tax in December that is not due till for following year.
If you have self-employment income, file a schedule C. Those deductions are not affected by AMT.
Keep these tips in mind while preparing your tax return. And check out the IRS guidance for the AMT Tax Assistant.