Proactive Approach Can Limit Your Tax Liability
If you're hoping to minimize your 2015 tax bill, it's critical to start planning now. This is especially true if you've ever come close to triggering the alternative minimum tax (AMT) and you think you might do so this year.
What is it?
The AMT - a separate tax system that doesn't allow certain deductions and income exclusions - initially was put in place to prevent wealthy Americans from taking so many tax breaks that they eliminated their tax liability. But even taxpayers who don't normally consider themselves "upper income" can trigger the AMT. For example, you could be vulnerable if you exercised incentive stock options this year or took a higher paying job.
AMT calculations can be complicated, but the system basically has two tax rates (26% and 28%) and inflation-adjusted income thresholds for them. An exemption is also available, but it phases out based on income. For 2015, the AMT exemptions are $53,600 for singles and heads of households and $83,400 for joint filers. The phaseout ranges are $119,200 to $333,600 for singles and heads of households and $158,900 to $492,500 for joint filers. If AMT income is within the applicable range, a partial exemption is available; if it exceeds the top of the range, no exemption is available.
Which one do you pay?
To determine whether you owe the AMT, you'll need to calculate your tax under both the regular and AMT systems. You're responsible for whichever amount is higher.
Under the AMT, you can't take a personal exemption for yourself and your dependents. And you aren't allowed to deduct such items as home equity debt interest not used to improve your home; state and local income and property taxes; and miscellaneous itemized deductions subject to the 2% floor. In addition, tax-exempt interest on certain private activity municipal bonds is taxable.
How do you reduce your bill?
Fortunately, strategies exist for minimizing AMT - and future tax - liability. For example, you might be able to postpone until next year the payment of deductible expenses that you aren't allowed to take for AMT purposes. Or you might want to recognize additional income this year to take advantage of the AMT's lower maximum rate (28% vs. 39.6% under the regular tax system).
There's also an AMT credit. If you pay the AMT in one year on deferral items (those that affect more than one tax year, such as depreciation) you may be entitled to a credit for a subsequent year. The credit, however, might provide only partial relief or take years before you can fully use it. Nonetheless, the AMT credit's refundable feature can reduce the time it takes to recoup AMT payments.
Make use of time
Some taxpayers don't even realize that the AMT is looming until it's too late to do anything to manage it. Talk to your Castellano, Korenberg & Co. tax advisor now while you still have several months to strategize.