The Taxpayer Relief Act of 2012, enacted in January 2013, raised the AMT threshold (also called the AMT exemption) and indexed it for inflation. The threshold for the 2012 tax year was raised to $78,750 for married couples filing jointly and $50,600 for single filers.
How the AMT Works
From one point of view, the AMT seems benign. It has only two tax brackets, with rates of 26% and 28%. For all but married couples filing separately, the 26% bracket applies to all taxable income up to $179,500, with 28% the levy above that mark. For couples filing separately, the cutoff is half that amount, or $89,750.
But the key to the AMT, and what makes it so effective at raising more tax revenue, is that it exposes more income to these rates. It does so by requiring taxpayers to recalculate their taxable income by adding back numerous deductions.
If your adjusted taxable income exceeds the applicable exemption amount, you have to calculate your AMT liability using the alternative brackets. If the sum total of AMT tax is higher than it would be using the regular income tax rates, you pay the higher amount instead.
Clearly, if your taxable income is close to the AMT exemption amount, you may be hit by the AMT. In particular, you may be vulnerable if you:
- Have a large family and claim a large number of personal exemptions
- Live in a state with high taxes and pay high real estate taxes
- Pay a large amount in interest on home-equity loans to pay for things other than home improvements
- Exercise incentive stock options, which generate ordinary income
- Own taxable (i.e. ”private activity”) municipal bonds
- Have large medical expenses
- Have realized large amounts of capital gains
Tips for Minimizing Your AMT
Here are some steps you can take to minimize your AMT Bill:
- Increase your charitable donations—if you itemize, they’re not added back ino your AMT taxable income.
- Invest in tax-free municipal bonds that are not “private activity bonds.”
- Maximize contributions to tax-advantaged retirement plans, like a 401(k) plan or traditional IRA
- Postpone exercising incentive stock options, or if you do, sell the stock you receive at the same time.
- If you’re a business owner, maximize allowable business deductions.
Please call to discuss how these changes will affect your situation.
Copyright © Integrated Concepts 2013. Some articles in this newsletter were prepared by Integrated Concepts, a separate, nonaffiliated business entity. This newsletter intends to offer factual and up-to-date information on the subjects discussed, but should not be regarded as a complete analysis of these subjects. The appropriate professional advisers should be consulted before implementing any options presented. No party assumes liability for any loss or damage resulting from errors or omissions or reliance on or use of this material.