Understanding the Alternative Minimum Tax (AMT) and Year-End Adjustments

When you're planning for year-end tax moves, the Alternative Minimum Tax (AMT) is a crucial factor to consider. It's designed to ensure that high-income taxpayers pay a minimum level of tax, regardless of deductions and credits. If you are someone who has benefited from significant deductions or exemptions in previous years, the AMT might apply to you this year. Here’s an easy-to-understand guide on how the AMT works and the adjustments you can make before year-end to minimize its impact.

What is the Alternative Minimum Tax (AMT)?

The AMT is a separate tax calculation designed to make sure that taxpayers who benefit from tax breaks, such as deductions for state taxes, mortgage interest, or large business expenses, pay at least a minimum amount of tax. Even if these deductions reduce your regular tax liability, the AMT ensures that you pay a fair share. For the AMT calculation, certain deductions and exemptions are added back into your taxable income, such as:

• State and local income taxes

• Mortgage interest on home equity loans

• Miscellaneous deductions

  
  

This results in a "modified" income, which is then taxed at a flat AMT rate, typically 26% or 28% depending on the amount of income. If the AMT calculation results in a higher tax than your regular tax, you will pay the AMT instead.

How Can You Adjust for AMT Before Year-End?

As the end of the year approaches, there are steps you can take to adjust your income or deductions to avoid triggering the AMT. Here are some strategies:

Defer Income: Consider delaying income to the following year, such as postponing year-end bonuses or capital gains, to keep your income below the threshold where AMT would kick in.

Maximize Deductions in a Regular Taxable Year: If you typically itemize deductions, try to maximize deductions that won’t trigger the AMT, such as charitable contributions. Avoid large deductions that are added back for AMT purposes, like state and local income taxes.

Review Stock and Investment Sales: Be mindful of large capital gains, which may push you into the AMT range. You may want to consider the timing of asset sales to avoid a bump in taxable income.

Who Is Most Likely to Be Affected by the AMT?

Taxpayers with higher incomes are generally at risk of triggering the AMT. Common scenarios include:

• High-income earners who live in states with high income taxes

• Taxpayers who claim significant deductions, such as large mortgage interest or business expenses

• Those with large families who claim multiple exemptions and deductions

  
  

For many, the AMT is a rare occurrence, but it’s important to be aware of the potential if you’ve had substantial deductions or credits in the past. If you are unsure whether the AMT applies to your situation or need help with year-end tax planning, don’t hesitate to reach out to us at info@mkhstaxgroup.com. Let us help you navigate these complexities and maximize your tax benefits.