Survive the Dreaded Alternative Minimum Tax – Secret Ways to Deal with It

Survive the Dreaded Alternative Minimum Tax – Secret Ways to Deal with It

For majority of the taxpayers in America, the scariest three-letter abbreviation is not IRS but it has shifted to AMT or Alternative Minimum Tax. This is something bigger than just tax as it is an entirely different way of computing your tax obligation, a way which doesn’t allow deductions and exemptions which could otherwise be in your favor. This can henceforth be deemed to be the evil twin of the traditional tax calculating procedure.

You may have the notion that your offspring will entitle you to different sorts of exemptions or taxes on property which can earn a deduction for you but alas, with the alternative minimum tax, you could just have a staggering tax bill waiting for you. This calculation occurs behind the curtain at the office of your tax preparer or even in disguise when you utilize tax software. Hence you wouldn’t even come to know what is going to hit and what isn’t going to affect you. Soon after you’re able to determine your tax obligations both the conventional way and the AMT way, you are obligated to pay the amount which is higher. There’s no such threshold of income for AMT to be applied but taxpayers with income between $200,000 and $500,000 are the most susceptible group.

Alternative Minimum Tax and the associated Irony

The professional tax specialists have often belittled the irony that is associated with Alternative Minimum Tax which was designed in 1969 to make sure that the extremely wealthy income earners paid their fair share of tax. This has gradually turned out to be something so scary that engulfs millions of middle-class and upper middle-class taxpayers of America. There are some political leaders who even belittle the AMT but it still carries on. The probable reason behind its continuation is because it generates a lot of revenue, around $35 billion in a year, as reports from the Tax Policy Center.

Lessening the impact of Alternative Minimum Tax – Is there something that you can do?

So, is there something that taxpayers can do to easily survive through the AMT or even reduce its consequence? There are numerous experts who deal with AMT on a daily basis and here is what they had to say on diminishing the impact of AMT.

  • Keep contributing more to your 401(k) account: Do you think you can contribute as much is possible to your 401(k) account or some similar retirement plan? If answered no, this is yet another valid reason to keep contributing money to your workplace retirement funds. If only you can reduce your taxable income, this can reduce your exposure to AMT. For the last year, 2015, the maximum contribution towards 401(k) for people under 50 was $18,000 and for people above 50 was $24,000. Try to max out your retirement funds.
  • Don’t stack up taxes: How about prepaying taxes on your property to raise your tax deductions for that year? You can pay a January bill in the month of December as this can often be considered as a smart move for saving on taxes. However, you shouldn’t do this if you’re subject to Alternative Minimum Tax. The AMT usually rebuffs your deductions on property taxes and negates all kinds of benefits. Moreover if it is seen that you are not subject to AMT in the next year, you will lose a possible deduction.
  • Carefully choose the AMT-free mini funds: The municipal bonds which are advertised as tax-free are not actually free of taxes with regards to AMT if you hold any ‘private activity’ bonds. These are usually issued by municipalities and states for non-federal reasons like building a new school. In case you’re shopping for mini-bond funds and you are pretty concerned about AMTs, make sure you choose those mini-funds which advertise themselves as AMT-free.
  • Stay watchful about home equity loans: The interest rate that you actually pay on your home equity loans are tax deductible and hence this is mostly considered as a cheap way of tapping equity and using the proceeds in paying for medical bills, college costs and other major purchases. But remember that the AMT will allow you to deduct money only when you utilize the money for several home improvements. Hence before investing in home equity loan, make sure you know what it could cost without a deduction in tax.
  • File a Schedule C when possible: Do you have self-employment income? If answered yes, file a Schedule C with an income tax return as this helps you reduce the load of AMT. The deductions which you claim on this form of Schedule C won’t be affected by Alternative Minimum Tax. Experts even suggest that the small business owners should seek advice from pro tax experts as they should be aware of the professional and legal fees. In case your business provided some charitable donations in ways other than cash, they may even be deductible.
  • Opt for a Roth IRA conversion: If you’re a high income earner, your top income should be taxed at the rate of 40% and this would trigger the AMT to offer a cheap Roth conversion. The money that you can convert will be taxed at the rate of AMT of 28% instead of 39%. But you can wonder about why you should convert a conventional IRA into a Roth IRA? Remember that withdrawals from a Roth IRA are tax-free and this could benefit you a lot when the rates rise. In case you don’t require money for living expenses, you may pass it to your heirs.

Alternative Minimum Tax can cost you big time in the form of increased taxes but if you want to survive its impact or lessen the results, you may follow the above mentioned tips and strategies. Save as much as possible on your taxes so that you can keep building your financial safe.

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