Category Archives: Blog

Strategies for Reducing Your AMT Bill

To comply with Internal Revenue Service Circular 230, we inform you that any tax advice contained on this website is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code or promoting, marketing or recommending to another party any tax-related matter(s) addressed herein.

The first question anyone asks who has faced an AMT bill is “How can I reduce it?”.  The easiest way is to reduce your AGI.  This can be done by increasing or maxing out your 401(k) contributions for the year (or 403(b), 457(b), or SIMPLE IRA contributions).  Also, if your employer offers a cafeteria plan, you can reduce your AGI by paying for medical, dental, life, and disability insurance, as well as dependent care expenses.

Other AMT minimization strategies are mostly for self-employed people and business owners.  If you have self-employment income, be sure to claim business expenses directly against that income on your Schedule C instead of as miscellaneous itemized deductions on Schedule A.  This way, you won’t lose any of the deductions when you compute your tax bill under AMT rules.  If you do have self-employment income, consider claiming a home office deduction (but be sure you have thorough documentation to support this deduction, since it is a common audit flag for the IRS).
Since itemized deductions are mostly eliminated under AMT rules, try to time real estate, state income, and other tax payments during years when your income won’t put you into AMT territory.
One last strategy to reduce the AMT is through charitable contributions.  Charitable contributions are still deductible under the AMT, but you will probably end up paying more total dollars out of pocket; a portion of the money will just go to a charitable cause rather than to Uncle Sam.
The AMT is very complex, so please be sure to consult a tax professional if you do end up owing the AMT!

Common Alternative Minimum Tax (AMT) Triggers

To comply with Internal Revenue Service Circular 230, we inform you that any tax advice contained on this website is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code or promoting, marketing or recommending to another party any tax-related matter(s) addressed herein.
 
If you found yourself paying the AMT the last couple of years or think you might have to pay it this year, it can be useful to understand what some common AMT triggers are.  The AMT (Alternative Minimum Tax) is a parallel tax system that replaces the regular tax code that applies to your return if you exceed certain limits.  Often the AMT kicks in if you have a lot of itemized deductions or certain types of income that are tax-free under the regular tax system.
Some common AMT triggers are:
-high amount of state and local taxes
-high number of personal exemptions
-medical expenses
-unreimbursed employee expenses (miscellaneous expenses)
-exercise of ISOs (incentive stock options)
-interest on home equity debt used for purposes other than buying, building, or improving your home
-accelerated depreciation
-long-term capital gains
-tax-exempt interest from private activity bonds
-passive income or losses
-net operating loss deduction
There are many other possible AMT triggers, but identifying one or more of these common expenses or types of income as the culprit behind your AMT bill is the first step in making important tax planning decisions.  Once you understand the drivers behind your tax liability you can improve both your short- and long-term investment and tax strategies.

Take Advantage of your W-4

To comply with Internal Revenue Service Circular 230, we inform you that any tax advice contained on this website is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code or promoting, marketing or recommending to another party any tax-related matter(s) addressed herein.

If you end up owing a large amount in federal or state taxes at the end of every year, or receive big refunds, you should consider updating your W-4 with your company (if you are self-employed, see post on making estimated payments).  You can complete a pro-forma tax return with estimates of your income, exemptions, deductions, etc., and contribute any extra amount you think you will owe.  To do this, run the pro-forma (or have an accountant do it), and divide the additional amount you will owe by the remaining paychecks you have in the year.  Your company should allow you to designate an additional amount in federal and/or state taxes that you want withheld on each paycheck.  If you typically receive a big refund, consider taking more allowances so you have less money withheld.  It is always best to come as close as possible to a zero dollar refund or payment each tax year so that you are not giving the government a no-interest loan all year, or are not pulling from your savings to make big tax payments.

Assessing your risk of underpayment penalty

To comply with Internal Revenue Service Circular 230, we inform you that any tax advice contained on this website is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code or promoting, marketing or recommending to another party any tax-related matter(s) addressed herein.
 If you have owed or come close to owing an underpayment penalty to the IRS in past few years, you may want to assess your tax liability for the year.  It is not too late to eliminate or mitigate your risk of owing an underpayment penalty for 2013.
1.  The general rule is you won’t have to pay a penalty if any of the following situations apply to you:
a.  your withholding and timely estimated tax payments are at least as much as your taxes due the prior year (110% of last year’s tax if your prior year AGI was more than $150K/$75K for married filing separately), or
b.  your tax balance due is less than 10% of your total tax bill for the year
c.  your total tax minus withholding is less than $1000
d.  you did not have any tax liability the prior year.
2.  You may have to pay a penalty if the total of your withholding and estimated tax payments is smaller than the lesser of:
a. 90% of your current year tax, or
b.  100% of your prior year tax (110% if your AGI in prior year was over $150K/$75K for MFS).
3.  Remember that you might still be assessed an underpayment penalty if you owed taxes in one payment period but paid them later in the year, since the penalty is calculated separately for each period.
If you think you might be at risk of owing an underpayment penalty, contact us today to determine what you owe!  Even if you make a late payment, the sooner you make that payment, the lower your overall penalty will be.