How to Reduce the Alternative Minimum Tax

The Alternative Minimum Tax (AMT) is a parallel, yet separate, alternative to what we might call the "regular" tax. The AMT has its strongest effect upon the middle class taxpayers. The Alternative Minimum Tax broadens the amount of taxable income by including things that would not be taxable under the regular tax. The AMT also prohibits many tax deductions.
There are things that can be done to soften the impact of the Alternative Minimum Tax.

Try and adjust the timing of certain income factors such as implementing stock options and selling stock.

Seriously consider your state and local tax load. State taxes play a large role in determining Alternative Minimum Tax because under the AMT, state taxes are not deductible. Some states like New York, Massachusetts, and California have particularly high taxes. Other states, like Texas, Nevada, and Florida have lower taxes. Living in a state with lower taxes will help you to more easily avoid the AMT.

Capital gains can seriously impact your AMT exemption. Always consider the implications of the Alternative Minimum Tax before you decide to realize any capital gains.

Some employee business expenses can affect the Alternative Minimum Tax. Before accepting any employer reimbursements, figure out how it will affect you in regard to the ATM. Perhaps you and your employer might work out an alternative.

Investors earn income on dividends, interest, capital gains, partnership or real estate investments. This income is variable depending on the amount of cash, bonds, stock, and other investments in your portfolio. Controlling the timing of investment income and the ability to change the investment type are crucial. Structuring the timing of investment income will greatly aid you in dealing with the AMT.

While it is true that you cannot change the timing of interest income, an investor could, conceivably, change the amount of dividend income earned by changing the strategy of investing. Please note that some income that is not taxable under regular taxes is taxable under the AMT.

If you are a retiree facing the Alternative Minimum Tax because of the type and/or amount of your investments, you might do well to contact a tax specialist or your financial planner. Together, you can discuss strategies involving your investment portfolio that might be helpful to you in regard to the AMT.

Alternative minimum tax is inevitable for middle class taxpayers. However, with smart strategies you can reduce its impact. Chintamani Abhyankar provides useful advice.

Chintamani Abhyankar, is a well known expert in the field of finance and taxation for last 25 years. He has written many books explaining inside secrets of the magic world of personal finance. His famous eBook Stop donating your money to IRS which is now running in its second edition, provides intricate knowledge and valuable tips on personal finance and income tax.