Plan Ahead to Reduce AMT in the Future

Ideas to help you plan Ahead to lower the AMT 

Planning to reduce the Alternative Minimum Tax is difficult and sometimes not possible. Congress keeps drafting laws to tighten the AMT because it collects so much tax revenue while they can claim to not raise taxes.

One of the best techniques for lowering the AMT is reducing adjusted gross income (AGI). Lowering AGI allows claiming a bigger AMT exemption. Lowering your AGI also reduces state and local income taxes, a primary component triggering AMT for many middle-income taxpayers. 

The following are techniques for reducing your AGI:

  1. Make a deductible IRA contribution if you qualify. Note, if you or your spouse is covered by a qualified plan, you will not be able to make the deductible contribution that lowers AGI.
  2. Maximize your contributions to your tax-deferred retirement plan such as Keogh Plans, SEP, SIMPLE, 401(k) plans. If you are over 50, there may be additional deductible contributions. 
  3. Increase your contributions to your employer-provided cafeteria benefit plan. Remember, contributions lower your taxable salary and thereby lower your AGI.
  4. Prepay deductible business expenses near year-end if you run a business as a sole proprietorship, LLC, partnership, or S corporation. The deductions are passed through to you, resulting in lower AGI. Similarly, postponing the receipt of taxable income until next year also reduces your AGI. Of course, this may result in significantly increased income for the following year!
  5.  Take some year-end losses on investments if applicable. You can use the capital losses to offset capital gains, which reduces AGI. Any leftover capital losses, up to $3,000, are deductible against taxable income from all sources (such as Schedule C or E income, salary, interest or dividends). So your AGI is reduced even further.
  6. Consider deferring security sales that produce taxable gains until next year. In addition, carefully time the exercise of any incentive stock options. Triggering these options when there's a big spread between current market value and the exercise price is one of the most common causes for unexpected AMT bills.

Call Ronald J. Cappuccio, J.D., LL.M.(Tax) at (856) 665-2121 if you suspect you may be subject to AMT. Smart planning can help you avoid or reduce the tax bite in future years.