Why You Need to Be Aware of the Alternative Minimum Tax (AMT)

The AMT – that is, the alternative minimum tax – is fast becoming the federal income tax most people pay.  While the tax originally was intended to be a tax for the “rich,” more and more of the middle class (as well as, of course, many wealthy taxpayers) now find themselves AMT taxpayers.  And if you are a business owner in New York State/City, the recently enacted increases in NYS and NYC tax rates, together with the AMT, may well result in a higher overall tax bill despite the highly published rate reductions in the regular federal income tax.

In broadest overview, the AMT is a fully separate, parallel tax system; a kind of shadow tax system lurking next to, and independently of, the so-called regular tax.  Calculating the amount of income tax payable to the federal government takes two fully separate procedures.  First, the regular tax must be calculated, taking into account all available deductions and exclusions.  Then, the AMT must be calculated.  In calculating income subject to the AMT, various deductions are eliminated and certain types of excluded income are added back in.  The actual tax owed is the higher of the regular tax or AMT.[1]  (Note that “alternative” in alternative minimum tax does NOT mean that there is a choice in whether or not you pay the AMT.)

To The Point

Before paying estimated state and local taxes in December, check to see if you will be an AMT taxpayer.  If so, the payment will give no federal tax deduction benefit.  Paying the amount in January will obtain a tax benefit for the following year (subject to AMT). Avoid unreimbursed employee business expenses.  The itemized deduction for these expenses is limited for regular tax purposes (by the "two percent floor") and no deduction is allowed for AMT purposes.Be sure to reimburse business expenses for any employee making over $100,000. You get a nice deduction and the employee does not have a tax headache when next April approaches. If you have incentive stock options, consult your tax advisor.  Special AMT planning often is appropriate for holders of this employee benefit.

The highest federal regular tax rate is 35% (lowered from 38.6% by the 2003 tax act).  The maximum AMT rate imposed on most types of income is only 28%.