Napier & Company, LCC

Back in the old days Congress decided to make high income earners pay at least some income tax under almost all conditions.  The rules had so many loop holes that it was not unusual for high income earners to report zero taxable income. Thus was born the concept of the Minimum Tax.  Naturally, they tinkered with the rules until finally they invented the Alternative Minimum Tax, or AMT.  One of the many values of the AMT to the government is that with a little inflation and little law manipulation, they could transform it from a tax on high income earners as it was originally intended, to a tax on the middle class. 

Now while there continue to be many esoteric categories of transactions that are subject to AMT adjustments that may trigger the AMT tax, the average middle class person is most effected by the  non-deductibility of state taxes for AMT purposes.  This is particularly true in the State of Oregon which has high state taxes.  As a result, prepaying your state income taxes may not always result in any federal tax benefit. 

Other AMT adjustments and some possible planning ideas are as follows:

• Miscellaneous Itemized deductions: Not allowed for AMT purposes.  If possible, change these deductions into deductions that are allowed for AMT purposes, such as a business expense.
• Medical and Dental expenses : Higher disallowance threshold for AMT purposes.  If you have a low income year, consider prepaying any medical expenses that you can as you are less likely to be in AMT in a lower taxable income year.
• Depreciation:  Assets are taken over a longer life and method for AMT than for regular tax purposes.  It may make sense to elect a different method and / or life for regular tax purposes to avoid the AMT tax.
• Incentive Stock Options:  These may trigger an AMT adjustment.  Review your option activity with your tax advisor before taking any action.
• Exemptions:  A large number of personal exemptions (dependents) may trigger AMT as the AMT exemption is not adjusted for the amount of exemptions for regular tax purposes.  If you are not receiving any benefit for your personal exemptions either due to AMT or taxable income reasons, consider having your dependents take their own exemption so that this is not lost.  This is assuming that they have income to report.
• Income level:  High income = higher likelihood of AMT.  If your income level in general is high enough to help trigger the AMT tax, consider having your business hire your dependents.  This will lower the business income and thus lower your own taxable income and exposure to the AMT tax.