The Tax Cuts and Jobs Act (TCJA) changed a lot of things. But unfortunately, it didn’t eliminate the dreaded Alternative Minimum Tax (AMT). The TCJA did change some of the AMT rules and it reduced the odds that you will qualify for the AMT.
AMT Risk Factors
That doesn’t mean everyone is immune. There are still certain risk factors that make you more likely to be subject to the Alternative Minimum Tax. They include:
• High Income–As mentioned, the AMT takes aim at high earners. If you have a substantial income, no matter how you earn it, you are more likely to lose your AMT exemption. That means your odds of owing the AMT increase.
• Incentive Stock Options (ISOs)–these do count as income under the AMT rules, so even though it’s not considered income under regular tax rules, you could be hit under the AMT rules.
• Private Activity Bonds Interest–if you have interest from private activity bonds you could increase you chances of being hit with the AMT. These are tax-free under regular tax rules, but not under the AMT rules.
• Higher Standard Deductions–the standard deductions under the normal tax rules are not allowed under the AMT rules. Because the TCJA nearly doubles the standard deduction amounts, this change has actually increased the risk of being hit with the AMT.
How to Avoid the AMT
There are some steps you can take to avoid these risks.
• Don’t Prepay State and Local Taxes–prepaying next year’s state and local property and income taxes at the end of the year will not help you avoid the AMT. They cannot be deducted under the new rules. Therefore, it’s best to wait till the year in which they are due to pay them.
• Spread Out Your In-the-Money ISOs–if you own these types stock options, it’s a good idea to exercise them over several years. If you exercise your ISOs too close together you could unexpectedly trigger the Alternative Minimum Tax.
• Stay Away From Private Activity Bonds–these bonds increase your chances of qualifying for the AMT, so it’s a good idea to avoid them.
Embrace the AMT
Whilemost taxpayers want to avoid the AMT, if you’re fairly certain it’s going to apply to you, you might just want to embrace it. After all, under the new tax law, you will only be taxed at 28% under the AMT, while the highest regular income tax rate is 37%.
Minimize the Risks
The TCJA has significantly reduced the chances of qualifying for the AMT. It has also reduced the amount you would owe if you were hit with this tax. However, if you want to do everything you can to avoid it then try implementing these helpful tips.
The post Are You Prepared to Avoid the AMT Under the New Tax Law? first appeared on Advisors to the Ultra-Affluent – Groco.
