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10 moves to help lessen the AMT's bite

A few days ago, I wrote about what taxpayers need to know about the alternative minimum tax, what causes you to get trapped by it and how to figure the amount you could owe because of it.

Generally, taxpayers reporting between $200,000 and $500,000 of adjusted gross income are much more likely to be subject to the AMT. But folks with lower incomes can also trigger this additional tax if they claim a larger number of deductions for items disallowed under the AMT.

Taxpayers who live in states with higher state income tax and property taxes are more likely to be subject to the AMT. In 2011, these five states accounted for nearly 50 percent of all taxpayers who reported owing the AMT: California (18%), New York (12%), New Jersey (6.5%), Texas (5.6%) and Illinois (5%).

In terms of the highest percentage of returns filed by residents paying the AMT, these states were top five: New Jersey (6.5%), Connecticut (6%), the District of Columbia (5.7%), New York (5.4%) and Maryland (4.9%).

States where the AMT is triggered the least include Alabama, Alaska, Mississippi, Nevada, South Dakota, Tennessee and Wyoming.

Also, families with more dependent children are more likely to owe the AMT. Taxpayers with three or more children are more apt to pay AMT versus childless taxpayers because the AMT denies exemptions for dependents that the regular tax system allows.

Tax strategies to minimize your AMT

Unfortunately, there really aren't any "silver bullets" for taxpayers who get tangled up in the AMT. The overall strategy involves reducing deductible expenses, not claiming exemptions or a combination of these moves. The objective is to drive up your taxable income under the regular calculations, so that your regular income tax is more than the AMT. A few tax-planning maneuvers to consider that can reduce the amount of AMT you owe are:

  • Move to a state with lower or no income taxes.
  • Lower your property taxes by selling a larger home and buying a smaller one.
  • Pay off a home equity loan/credit line debt that was NOT used to buy, build or improve a home.
  • If self-employed, claim the home-office deduction, which allows some of your real estate taxes to be deducted against the self-employment income, which isn't affected by the AMT.
  • In a year that you will be subject to the AMT, don't prepay your real property tax, and don't pay the fourth-quarter state estimated tax payments in December. You get no benefit from paying these taxes in a year that you are subject to the AMT.
  • If you are subject to the AMT, there's no advantage to using your home equity line of credit to buy a car, because the interest will not be deductible. You may be able to get a lower interest rate from a regular car loan.
  • Don't claim dependent exemptions for college-age children. Allow them to claim themselves and possibly claim education-related tax credits.
  • Sell municipal bonds that have interest subject to the AMT (these are referred to as private activity bonds).
  • When exercising incentive stock options, sell some shares to realize income on the share gains.
  • Reduce income from investments, particularly qualified dividend income, which is taxed at the lower-percent tax rate
Also, if you have a taxable state tax refund on your regular tax return, remember: you shouldn't report it in your income for AMT purposes because you do not receive a corresponding deduction for state taxes.
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