How to Avoid AMT

Planning Your Investments

Max out your retirement contributions. A retirement plan such as a 401(k) allows you to make contributions that reduce the amount of your income that is taxed. Making the full amount of contributions allowed under such a plan helps to lower your income and AMT liability. Current information about contribution limits can be found in IRS Publications 590-A (for IRAs) and 560 (401(k) plans). If you are self-employed, making the maximum allowable per-year contributions to your SEP IRA, SIMPLE IRA, solo 401(k) or similar plan can have the same benefit.

Avoid private activity bonds and other investment income sources that are not tax-exempt. Some kinds of interest that are normally tax-exempt are not exempt under the AMT. A very common example of this is interest earned from so-called “private activity” bonds. These types of bonds are issued to fund private, non-governmental projects such as the construction of buildings. If you have an investment portfolio that is not based in a tax-deferred account such as an IRA, you can reduce the impact it has on your AMT liability by investing in tax-exempt bonds and tax-efficient mutual funds. Talk to your financial advisor or investment broker about the best options for your portfolio. Buying tax-exempt bonds is not always the best strategy. Because the maximum tax is 28%, the difference in interest rates between a tax-exempt and taxable bond must be 28% or less to invest in a tax-exempt bond. In other words, sometimes investing in a taxable bond and taking the tax hit is better for your portfolio than buying a tax-exempt bond.

Decide how to handle stock options, if applicable. If your employer offers incentive stock options (ISOs), you want to exercise this option, and you face the AMT, you will need to plan carefully. ISOs are often offered at a discounted price; under the regular tax system, you will only be taxed on ISO investments when you sell them. However, if you are subject to the AMT, you will owe taxes on the difference between the stock’s actual market value and the price you actually paid for them. You can sell the stock before the end of the tax year in which you exercise the ISO. If the stock falls, you will be subject only to the regular tax on the gain between the amount you actually paid for the stock and the lower market price, and the investment earnings will not be subjected to the AMT. Choosing how to incorporate ISOs into your investment portfolio and tax situation can be extremely complicated. It is best to have a tax adviser (or tax software you are familiar with) thoroughly analyze your finances, project the outcome of a number of different potential scenarios, and help you decide which is best in your case.

Planning Home Expenses

Use home mortgage interest for purposes directly related to your home. Due to the 2017 Tax Cuts and Jobs Act, you can no longer deduct home equity mortgage interest for home equity loans that were taken out in 2018 or later if the loan proceeds were used for personal reasons (applicable to both regular income tax and AMT). Therefore, if you are subject to the AMT, there is no incentive to take out a home equity mortgage unless you will use the funds to buy, build, or improve your home. Note that if you took out your home equity loan prior to 2018 and used the funds for personal reasons, you are still able to deduct the associated interest for regular income tax but not for AMT.

Consider renting instead of buying property. Renting instead of owning a home or paying a mortgage may help reduce your chances of being subject to the AMT, especially if property taxes are high in your area. Typically, if you rent your home, you are not responsible for paying property taxes and do not have to worry about factoring them into your taxes. Under the regular tax system, you can often deduct any property taxes you pay from the amount of tax you owe; under the AMT, these would-be deductions may be added back to your taxable income, raising it and the amount of tax you may owe. Note that the total state and local tax deduction (which includes property and income taxes) is now limited to $10,000. While renting may decrease the amount of tax you owe, it may also cause you to lose out on the capital appreciation that potentially comes from owning your own home. Thus, it is best to weigh this option carefully along with other factors that apply in your situation.

Consider moving to a state with no income tax and low property taxes. If you live in in a state that has low (or no) state, local, and property taxes, then these will not be effectively weighed against you when determining whether or not you are subject to the AMT. If you do not already live in such a state, you may consider moving to one if it suits your financial and personal situation. If you are considering moving to another area, research the cost of living in that area. Factor this into your hypothetical financial situation if you were to live there, and decide if moving would be a sensible choice.

Maximizing Your Deductions

Itemize many common deductions rather than taking the standard deduction. Under the AMT, you are not allowed to take the standard tax deduction. However, claiming many itemized deductions will enable you to lower the tax you owe, even if the itemized deductions amount to less than the standard deduction.

Avoid Miscellaneous Itemized Deductions due to changes to the tax law. The 2017 Tax Cuts and Jobs Act states that Miscellaneous Itemized Deductions are not allowed from 2018 to 2025. Additionally, miscellaneous deductions, typically employee-related expenses not reimbursed by an employer, are not permitted under the AMT. If you have such expenses, you should try to eliminate them, or change how you pay for them: Ask your employer to reimburse you for work-related expenses. That way, you replace the lost income, and the expenses will not be considered taxable income under the AMT. For tax purposes, it is best if your employer reimburses your expenses, rather than providing you with an advance (which will be treated as taxable income). If your employer will not or cannot reimburse you for expenses, consider negotiating. Even if your employer will reimburse part of your expenses, or if you take a lower salary in exchange for reimbursement, you may come out ahead. If you are self-employed, claim your business expenses on your Schedule C rather than as Miscellaneous Itemized Deductions on Schedule A. This lowers your AGI and prevents you from losing the deductions to the AMT.

Pay property and state/local income taxes when it makes the most sense. In most cases, the AMT does not allow you to itemize deductions for paying many common taxes, such as property taxes and state and local income taxes. Under the regular tax system, it is often a good idea to pay these taxes ahead of time (pay them in December if they are due in January, for instance) in order to maximize your deductions. However, if you may be subject to the AMT, there is no incentive to pay these taxes early. Keep in mind that $10,000 is the limit for total state and local tax deductions (which includes property and income taxes). Taxes that are deductible on a business schedule (Schedule C), rental schedule (Schedule E), or farm schedule (Schedule F), are allowed under the AMT. If you are self-employed, you may be able to claim some of these taxes as a deduction if they are part of a home office deduction. This type of deduction reduces your AGI and the amount of your self-employment income that is subject to the AMT.

Time medical expenses to avoid the AMT. Medical expense deductions are only allowed if they exceed 10% of your Adjusted Gross Income (AGI) for both AMT and the regular tax system. Sign up for a pre-tax medical expense deduction plan, if your employer offers one. This will reduce your pre-tax salary, and may help lower your AMT and/or regular-system tax. If you have pending medical procedures with flexible dates, you may want to delay them until a tax year in which you are facing the AMT; if the expenses amount to more than 10 percent of your AGI, you may be able to deduct them.

Familiarizing Yourself with the AMT Regulations

Know when you definitely have to complete IRS Form 6251. If you meet certain conditions, you are required to complete IRS Form 6251 to determine what AMT you owe, if any. If you received or claimed any of the following items in a tax year, then you will have to complete Form 5251: Accelerated Depreciation Stock by exercising an incentive stock option and you did not sell the stock in the same year Tax-exempt interest from private activity bonds Intangible drilling, circulation, research, experimental or mining costs Amortization of pollution-control facilities or depletion Income (or loss) from tax-shelter farm activities or passive activities Income from long-term contracts not figured using the percentage-of-completion method Interest paid on a home mortgage if it was not used to buy, build or improve your home Investment interest expenses reported on Form 4952 A net operating loss deduction Alternative minimum tax adjustments from an estate, trust, electing large partnership or cooperative Section 1202 exclusion Any general business credit in Part I on Form 3800 An empowerment zone and renewal community employment credit A qualified electric vehicle credit An alternative fuel vehicle refueling property credit Credit for prior year minimum tax

Review IRS Form 6251 carefully. If you are or may be subject to AMT, study Form 6251 and accompanying instructions carefully for a detailed overview of the elements used to calculate AMT liability. Be sure to fill out the form correctly to avoid any problems.

Get help from a tax professional, if necessary. Tax laws and forms can be very confusing, especially due to yearly changes in tax law. If you have any questions or concerns, meet with a tax professional like a Certified Public Accountant.