The top alternative minimum tax (AMT) rate is 28%, compared to the top regular ordinary-income tax rate of 39.6%. But the AMT rate typically applies to a higher taxable income base and will result in a larger tax bill if you’re subject to it.
Midyear is a good time to check on whether any events in your financial life during the first six months of the year make it likely you’ll owe the AMT when you file your 2016 return.
You’ll be subject to the AMT if your AMT liability is greater than your regular tax liability. Some income items that might trigger the AMT include:
Long-term capital gains and dividend income, even though they’re taxed at the same rate for both regular tax and AMT purposes,
Accelerated depreciation adjustments and related gain or loss differences when assets are sold,
Tax-exempt interest on certain private-activity municipal bonds, and
The exercise of incentive stock options.
Income isn’t the only thing that can trigger the AMT. So can deductions, because many popular deductions aren’t allowed under the AMT, such as state and local income and property tax deductions.
Avoiding or reducing AMT
If it looks like you could be subject to the AMT in 2016, consider accelerating income into this year. This may allow you to benefit from the lower maximum AMT rate. And deferring expenses you can’t deduct for AMT purposes may allow you to preserve those deductions. If you also defer expenses you can deduct for AMT purposes, the deductions may become more valuable because of the higher maximum regular tax rate.
For help assessing whether you could be subject to the AMT this year — or for more ideas on minimizing any negative consequences from the AMT — please contact us.