Alternative Minimum Tax (AMT) Part 2 - What You Can Do to Reduce its Impact on You and Your Taxes

Did your tax bill go up dramatically this year, courtesy of the alternative minimum tax (AMT)? You're not alone. Every year, this happens to more and more people. That's because the single exemption allowed in the AMT has not kept pace with inflation. Read on for some things you can do to reduce the negative effects of this tax for next year's tax bill. First of all, you need to be prepared for a lot of extra paperwork if you want any chance at avoiding or minimizing the AMT. Here are some of the actions you can take to keep more of your hard-earned money: 1. Time Your Income and Your Deductions Analyze your possible deductions and whatever income where you might be able to adjust the timing (for example selling stocks and exercising options) in order to avoid becoming subject to the ATM. You'll need to check the numbers throughout the tax year as you aim for the best possible combination of income and deductions that will enable you to remain within the traditional, i.e., the non-AMT, tax system. One "quick and easy" way to help you avoid the AMT is to aim for keeping your actual tax bracket above 28%. 2. Move to Nevada, Texas, or Florida Since state taxes are a major deduction for most people, moving to a state that has low(er) or no state taxes will make you less likely to be affected by the AMT. Wage earners in states with higher tax rates such as California, New York, or Massachusetts on the other hand are practically guaranteed to fall within the reach of the AMT sooner or later, so if a move seems feasible, it would be a good one to consider. If you want something a little less drastic than moving to Nevada, consider one of the following options: 3. Exercise Skillful Timing While the taxes you pay for capital gains are calculated at a lower rate, capital gains themselves do enhance the income that counts towards AMT "eligibility" and can cause you to lose either a part or possibly even all of your AMT exemptions. Make every effort to time such gains so they are counted in those years when you have more leeway with your exemptions. Similar efforts in timing and careful calculations are necessary with a variety of other investments. Timing is also important when it comes to possibly taking credit for your AMT payments (yes, you may be able to get a credit in future years if you play it right). And lastly, you may be able to time your state taxes and your itemized deductions so they won't trigger the AMT -- at least in some years. 4. Employee Business Expenses Do you usually deduct unreimbursed business expenses? In that case, you'll likely lose that deduction. Check in with your employer about the business expenses that you tend to pay out of your own pocket, and work out an alternative arrangement so that these expenses won't have to be claimed as deductions. For example, you could ask your employer to pay these expenses for you and reduce your salary by that same amount. No matter which of these strategies you will need to use, they all require a lot of math and paperwork. Yet with thousands (or even tens of thousands) of dollars at stake, you may just have to find a way to get it done.