The Alternative Minimum Tax (AMT) is a parallel tax system designed to ensure that high-income taxpayers pay a minimum amount of tax, regardless of deductions and credits. Originally targeting a small number of wealthy individuals, AMT now affects many upper-middle-class taxpayers.

How AMT Works

• Calculate regular tax and AMT separately
• Pay the higher of the two amounts
• AMT uses different rules for deductions and exemptions
• Two AMT rates: 26% and 28% (vs multiple regular tax brackets)
• AMT exemption phases out at higher incomes

Common AMT Triggers

• State and Local Taxes: Not deductible for AMT
• Incentive Stock Options: Bargain element taxable for AMT
• Private Activity Bonds: Interest taxable for AMT
• Miscellaneous Deductions: Not allowed for AMT
• Large Capital Gains: Can trigger AMT due to income level
• Many Dependents: Personal exemptions not allowed

AMT Planning Strategies

• Time Income and Deductions: Shift items between AMT and non-AMT years
• Manage ISO Exercises: Spread over multiple years to minimize AMT
• Review Investments: Avoid private activity bonds if subject to AMT
• Maximize Retirement Contributions: Reduce AMTI through deductible contributions
• Track AMT Credit: Carry forward to reduce regular tax in future years

Important Considerations

• AMT paid may generate a credit for future years
• State tax refunds may be different under AMT
• Estimated tax payments should consider AMT
• Year-end planning crucial for AMT management
• Professional tax advice recommended for AMT planning