Regular tax and Alternative Minimum Tax (AMT)

THERE are two types of income tax – Regular and AMT. Currently, regular tax rates are: 10%, 15%, 25%, 28%, 33%, 35%, 39.6%,  while AMT tax rates are: 26% with alternative taxable income (ATI) of  not more than $186,300 in 2016, 28% with ATI greater than $186,300 from $185,400 in 2015. AMT limits the excessive use of deductions, credits, and exclusions to make sure individual and corporate with sizeable income do not get around with their tax liability. If the AMT is more that the regular tax liability, the excess is a tax liability in addition to the regular tax. If AMT is less than the regular tax, it may make sense to accelerate income and take advantage of the lower AMT rate.

How AMT Works

AMT is figured separately that add back what you deduct for regular income tax. The most common adjustments and preferences or deductions not allowable for AMT that result in add-back and higher taxes in Form 6251are:

• Regular personal and dependent exemptions deductions.

• Standard deduction for those who do not itemize.

• Medical deductions for AMT threshold is 10% of adjusted gross income. The difference between 7.5% and 10% is added back for taxpayers who are 65 years old and over.

• Deduction for local, state, and foreign income, sales, and property taxes.

• Home equity loan interest when loan proceeds are not used for home improvements.

• Miscellaneous itemized deductions subject to the 2% of AGI floor (such as tax professional fees, investment expenses, and employee business expenses).

• Interest income from private activity bonds exempt from regular tax.

• The difference between regular tax and AMT depreciation.

• The spread between exercise price and market value for incentive stock options.

Ways to Prevent or Minimize AMT

Here a few tips to prevent or minimize your AMT:

• Regular tax and AMT both starts with adjusted gross income before exemptions, deductions, and adjustments. When regular tax rate is higher than that of AMT rate, consider accelerating income to take advantage of the lower AMT rate.

• Claim to dependent’s exemption under multiple support agreement together provided more than 50% of    dependent’s support, agree to designate claim of exemption to taxpayer who is not taxed with AMT.

• Release of claim to exemption for child of divorced parents, consider to release claim to parent not affected by AMT unless there are other prevalent reasons aside from taxes.

• You may elect to itemize even if deduction is lesser than the standard deduction if the increase in regular tax amount outweigh the decrease in AMT tax amount.

• It might be appropriate to accelerate paying medical expenses if not affected by AMT otherwise defer to year regular tax is expected.

• Avoid losing the benefit of tax deduction to AMT. If not subject to AMT prepay last year’s taxes otherwise defer tax payments to following year if tax benefit exceeds the under-payment penalty. Be cautious of the Revenue Ruling 82-208 when there is no reasonable basis for estimated state tax payment a deduction will be denied.

• Do not use home equity loan proceeds to pay off debts that generate nondeductible personal interest such as  personal credit card balances personal use.

• Generate deductible capital losses by selling investments and stocks whose value has gone down.

• Watch out for Tax Plan Tips That Works for Regular Income Tax but Does Not Work for AMT and State Tax Liabilities.

2016 AMT exemption amount are: $53,600 same amount in 2015 for single and head of household, $83,800 from $83,400 in 2015 for married filing jointly, $41,900 from $41,700 in 2015 for married filing separately. These amounts are expected to increase in 2017 to $54,300, $84,500, and $42,250, respectively.

In accordance with IRS Circular 230, this communication is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose.

* * *

Sy Al-os Accountancy Corporation provides accounting and tax services to individuals, corporations, LLCs and business entities. The Firm has a niche in defending taxpayers audited by the IRS and other governmental agencies.