Six Figure Income? The Alternative Minimum Tax Could Wipe Out Your Tax Savings Deductions

The Alternative Minimum Tax (AMT) remains a significant concern for many taxpayers, particularly high-income earners and business owners. While recent tax law changes have reduced the number of taxpayers affected by AMT from approximately 5 million in 2017 to about 200,000 today, those impacted face significant additional tax liability. Understanding and planning for AMT is crucial for effective tax management.

Understanding the AMT

The AMT operates as a parallel tax system designed to ensure that high-income taxpayers pay at least a minimum amount of tax, regardless of deductions or credits. Think of it as a "backup tax system" that kicks in when too many tax preferences are claimed under the regular tax system. When your AMT liability exceeds your regular tax liability, you must pay the difference as AMT.

Who is Most Likely to be Affected?

Typical AMT triggers include:

• High-income earners (generally those earning above $200,000 annually)
• Taxpayers with significant state and local tax deductions
• Those exercising incentive stock options
• Individuals with large capital gains
• Business owners with certain depreciation schedules
• Taxpayers with significant miscellaneous itemized deductions

Impact on Tax Liability

The AMT can significantly increase your overall tax burden. For example, a taxpayer in the 35% regular tax bracket might find themselves paying an additional 28% AMT rate on income that was otherwise sheltered from regular tax. This can result in tens or even hundreds of thousands of dollars in additional tax liability.

How Durfee Law Group Can Help

At Durfee Law Group, we specialize in sophisticated tax planning that addresses both regular tax and AMT concerns. Our approach includes:

1. Comprehensive AMT Projection and Analysis 

2. • Early identification of AMT exposure
   • Multi-year projection modeling
   • Strategic timing of income and deductions

3. Customized Planning Strategies 

4. • Structuring transactions to minimize AMT impact
   • Coordinating business and personal tax planning
   • Implementing effective timing strategies

5. Ongoing Monitoring and Adjustment 

6. • Regular review of tax positions
   • Proactive adjustments to changing circumstances
   • Coordination with investment and business strategies

7. Expert Implementation 

8. • Detailed documentation of planning strategies
   • Coordination with tax preparers and financial advisors
   • Regular updates and strategy refinement

Part I: Year-End Tax Planning Strategies

Income Timing Strategies

Income Management:

• Review timing of year-end bonuses
• Evaluate capital gains/losses harvesting opportunities
• Calculate required minimum distributions (RMDs)
• Assess Roth conversion opportunities

Business Income Planning:

• Review accounts receivable collection timing
• Evaluate Section 179 equipment purchase opportunities
• Consider bonus depreciation strategies
• Plan year-end billing cycles

Deduction Optimization

Individual Deductions:

• Plan charitable contributions (consider bunching strategy)
• Review state and local tax payments (SALT cap)
• Analyze mortgage interest timing
• Calculate medical expense thresholds
• Evaluate education expense timing

Business Deductions:

• Plan employee bonus payments
• Calculate retirement plan contributions
• Review business expense timing
• Assess professional fee payments

Investment Strategies

Portfolio Management:

• Review tax-loss harvesting opportunities
• Evaluate portfolio rebalancing needs
• Analyze investment expense deductions
• Consider tax-efficient investment options

Part II: Alternative Minimum Tax Management

AMT Review Checklist

Basic Assessment:

• Calculate potential AMT exposure
• Review AMT adjustments and preferences
• Compare regular tax vs. AMT liability
• Identify AMT triggering items

Common AMT Adjustments:

• State and local tax deductions
• Personal exemptions review
• Standard vs. itemized deduction analysis
• Mortgage interest qualification
• Stock option exercise implications

AMT Preference Items:

• Private activity bond interest
• Percentage depletion calculations
• Intangible drilling costs
• Tax shelter farm loss review

AMT Calculation Steps

Preparation Steps:

• Determine AMT taxable income
• Calculate AMT exemption amount
• Apply appropriate AMT tax rates
• Compare with regular tax liability

2024 AMT Exemption Verification:

• Confirm filing status exemption amount
• Check phase-out thresholds
• Calculate applicable exemption
• Document calculations

Part III: Year-End Planning Considerations

Timing Strategies

Income Management:

• Review income acceleration/deferral options
• Develop multi-year AMT minimization strategy
• Assess impact of timing decisions
• Document planning decisions

Deduction Planning:

• Time state tax payments strategically
• Plan charitable contribution timing
• Review medical expense thresholds
• Evaluate business expense timing

Investment Planning

Strategic Considerations:

• Review incentive stock option exercise timing
• Evaluate tax-exempt investments
• Plan capital gain/loss harvesting
• Assess investment timing decisions

Business Owner Planning

Entity Considerations:

• Review business structure implications
• Plan business income/deduction timing
• Evaluate equipment purchase timing
• Select optimal depreciation methods

Part IV: Implementation Checklist

December 2024 Actions

Immediate Steps:

• Complete year-to-date income review
• Project year-end tax liability
• Calculate AMT exposure
• Execute time-sensitive transactions

Documentation Requirements:

• Gather tax planning documentation
• Organize charitable contribution receipts
• Compile investment transaction records
• Collect business expense documentation

Professional Consultation:

• Schedule year-end planning meeting
• Review AMT projections
• Discuss multi-year strategy
• Address tax law changes

Part V: 2024 Special Considerations

Current Year Review

Tax Law Updates:

• Review inflation adjustment impacts
• Note business expense rule changes
• Verify retirement account limits
• Confirm charitable giving rules

Economic Factor Analysis:

• Assess interest rate impacts
• Review market volatility effects
• Calculate inflation implications
• Consider business cycle impacts

Action Plan Checklist

Immediate Steps:

• Review current tax situation
• Create year-end income projection
• Calculate AMT exposure
• Implement timing strategies
• Document all planning actions
• Schedule professional consultation

Long-term Planning:

• Develop multi-year tax strategy
• Create documentation system
• Schedule quarterly reviews
• Plan ongoing professional consultations

Notes and Reminders

Remember:

• Keep detailed records of all tax planning decisions
• Document reasoning for timing choices
• Save copies of all relevant documentation
• Schedule regular review dates
• Set reminders for key deadlines
• Plan for quarterly strategy updates

Contact Information  Our experienced team is ready to help you navigate these complex tax issues and develop a customized strategy for your specific situation.

For expert assistance with your tax planning and AMT strategies, contact:

Norris Lozano, Senior Tax Attorney   

Email: norris@durfeelawgroup.com

Durfee Law Group

1423 S. Higley Rd Ste 127 

Mesa, Arizona 85206 

Main Office: (480) 324-8000

Six Figure Income? The Alternative Minimum Tax Could Wipe Out Your Tax Savings Deductions © 2024 by Durfee Law Group is licensed under CC BY 4.0