The key to understanding the AMT and decreasing your AMT tax bill lies in understanding which deductions can be used under both systems and which ones can only be used under the regular tax system. For example, when you have another child, you get another $3,950 exemption under the regular tax system but not under the AMT. You also cannot deduct state and local income taxes, property taxes, child care expenses, or interest earned on certain types of municipal bonds. However, charitable contributions, most mortgage interest, and retirement account contributions can be used under both systems.
Explore This IssueACEP Now: Vol 34 – No 02 – February 2015
The following events can cause you to owe more taxes due to the AMT:
- Having another child
- Moving to a high-tax state
- Paying off your mortgage
- Reducing your tax-deferred retirement account contributions
- Taking the standard deduction
- Increasing your income
- Investing in “private activity” municipal bonds
- Decreasing your charitable contributions
If you wish to reduce your tax bill, you simply need to do the opposite and take advantage of deductions valid under both systems by:
- Increasing retirement contributions
- Giving more to charity
- Paying a lot of mortgage interest
- Avoiding “private activity” municipal bonds
- Deferring income to the new year (making less)
Obviously, giving more to charity and paying more interest on your house may not make you wealthier, even if they do lower your tax bill. But if you are going to do these things anyway, you might as well maximize the benefits.
Once you have your tax data plugged into the program, play around with the numbers on the 1040 and Schedule A. See what happens if you make $1,000 more or less. See what happens if you pay your property or state income taxes in December instead of in January.
If you really want to get serious about tax planning, either find a good tax strategist (most tax preparers won’t take the time to do this) or learn how to do it yourself with inexpensive tax software, such as Intuit’s TurboTax. Once you have your tax data plugged into the program, play around with the numbers on the 1040 and Schedule A. See what happens if you make $1,000 more or less. See what happens if you pay your property or state income taxes in December instead of in January. Charitable deductions can also be bunched or unbunched as needed to minimize the tax. However, if you find you are in the sweet spot, where additional income is only taxed at 28 percent instead of 35 percent, consider accelerating income (perhaps by doing Roth conversions) or deferring deductions (like charitable contributions) to next year. Remember to pay attention to the total tax bill, not just the AMT.