alternative minimum tax

The AMT was designed to prevent wealthy taxpayers from using tax loopholes to avoid paying taxes. Because historically the exemption from the AMT had not been automatically adjusted for inflation and certain common deductions were not allowed in computing the AMT, millions of middle class taxpayers were finding themselves subject to the AMT. However, Congress provided some annual relief in the recent past by installing “AMT patches” which increased the AMT exemption.

ATRA permanently increased the AMT exemption beginning in 2012 and provided for indexing of the exemption for 2013 and beyond. Since ATRA increased income tax rates for certain taxpayers beginning in 2013, fewer people may be subject to the AMT while paying a higher overall rate. Proper planning requires a 2-year analysis in order to determine the true benefits you can achieve. ($84,500 for 2017)ifmarried filingjointly, $53,900 for ($54,300 For 2016,you are allowed anAMT exemption ofupto $83,800 Beginning in2013,theexemption amountisindexed for inflation. AMT EXEMPTION in taxyear 2013. maximum 20%rate for boththeAMT andregular taxbeginning term capitalgains andqualifieddividendsare taxed atthesame orless is subjectto ataxrateof $186,300 of26%. Netlong- ($93,900 for 2017)netofany allowable exclusion. Ordinary AMTI als ($187,800 for 2017)and$93,150 ifmarriedfilingseparately in excess for jointreturns of $186,300 and unmarried individu For 2016,the28%maximumtaxrate appliesto ordinary AMTI AMT RATES issued before 2010isstillsubjectto theAMT. 2009andafter fore, notsubjectto theAMT. However, theinterest onsuchbonds 2009 and2010are nolonger anitem oftaxpreference and,there Tax-exempt interest onspecifiedprivate activity bondsissued in PRIVATE ACTIVITY BONDINTEREST qualified dividendsmay trigger theAMT. Tax Tip 6explains how state taxes onlong-term capitalgains and Tax Tip 5demonstrates thehighcost ofbeingintheAMT. value exceeds theexercise price. exercise of incentive stock options to the extent the fair market tax purposes but taxable for AMT purposes. One example is the AMT purposes.Andsomeforms ofincome are exempt for regular ciation onbusiness property, may bedifferent for regular taxand when computing your AMTI. Otherdeductions,suchasdepre and localincome taxes andreal estate taxes, are notdeductible AMTI. illustrates, Asthechart deductions,suchasstate certain 3 showsChart most of the adjustments necessary to calculate your regular tax.You willpay thehigher oftheregular taxortheAMT. maximum taxrate, your AMT liability may behigherthanyour even thoughtheAMT maximumtaxrate isless thantheregular regular taxare not deductibleorallowable incomputing AMTI. So, Many deductionsandtaxcredits thatare usedto calculate your to arrive atyour alternative minimumtaxable income (“AMTI”). regular taxable income point,adjustmentsare asastarting made The AMT iscomputed separately from your regular tax.Usingyour WHAT TRIGGERSTHEAMT? - - - to benext year: You are subjectto theAMT inthecurrent year, butdon’texpect possible AMT scenarios to planfor: your overall tax liability. 3 to guide you, Using Chart here are 3 subject to theAMT. This canenableyou to take steps to reduce Tax planningcanhelpyou determine whetherornotyou willbe PLANNING FOR AMT SCENARIOS range, your marginal AMT taxrate canbeashigh35%. Be advisedthatwhileyou are intheAMT exemption phaseout (married filingseparately). filing jointly), $337,900 (single orheadofhousehold)$249,450 out for taxpayers whentheirAMTI reaches $498,900 (married for 2017)ifmarriedfilingseparately. Exemptions are fullyphased 2017) iffilingsingleorheadofhousehold$41,900 ($42,250 •  •  •  •  •  from theexercise ofISOs. chapter thatmay offer somecredit relief for theAMT resulting chapter on stock options. Also, seethe rule discussed later in this options, consider adisqualifyingdispositionasdiscussed inthe market value andtheexercise price. Ifyou already exercised the could wind uppaying theAMT onthespread between thefair Delay exercising any incentive stock options(“ISOs”) since you next year orwould otherwisebeheldlongterm. lower AMT rates, unless thesegains willoffset short-term losses Realize netshort-term capitalgains thisyear to benefitfrom the the lower AMT rate. Accelerate ordinary income into the current year to benefit from allowed for AMT purposes. used to lower even the3.8%surtax ifthedeductionsare not etc. are directly allocableto netinvestment income andcanbe Expenses suchasstate andlocaltaxes paid,investment fees, taking such deductions in the current year, even if in the AMT. when computing netinvestment income may want to consider for AMT butconsidered adirect expense thatcanbededucted Taxpayers withlarge itemized deductionsthatare disallowed prepaying your state income taxes before theendofyear. deductible for AMT purposes.Avoid thepitfall ofautomatically Defer untilthefollowing year any deductionsthatare not

alternative minimum tax 23 EisnerAmper 2017 personal tax guide 24 tax tip

31, 2016,youpaidthefollowingexpenses: Failing toconsidertheAMTandincorrectlytimingpaymentofsomeyourdeductionscanbecostly.Let’ssaythatbeforeDecember of prepayingcharitable contributions. Therefore, youlost thefullbenefitfromprepayment ofyourstateestimatedtaxand realestatetaxes,aswellsome ofthebenefit Because youmustpaythehigherof thetwotaxes,yourtaxwillbe$40,341—that’s$20,913ofAMT taxinexcessofyourregulartax. investment income) Total federaltax(includingMedicare ContributionTaxonnet Medicare ContributionTaxonnet investmentincome Federal tax Taxable income Personal exemptions(marriedwith2children)(afterphaseouts) Net itemizeddeductions 3% AGIFloor Disallowance ofadvisoryfees(2%AGI) Investment advisoryfees Contributions Mortgage interest Real estatetaxes State &localincometaxes Total income Long-term capitalgains Qualifying dividends Earned income • • • $20,000 incharitablecontributions thatyou could have delayed until 2017. $10,000 inreal estate taxes (notdueuntilJanuary, 2017),and $15,000 state taxpayment estimated fourthquarter (due January15,2017), 5 THE HIGHCOST OFTHEAMT Income Deductions Year-End Payments Regular TaxAfter $ 19,428 $ 400,000 200,000 $ $ 14,374 $ 100,000 $ 224,339 $ $ 171,125 175,000 (8,000) 40,000 50,000 20,000 25,000 25,000 (2,661) 5,054 4,536

$ 310,000 $ 40,341 $ 35,287 $ 90,000 $ 400,000 $ $ 200,000 $ 0 AMT 175,000 40,000 50,000 25,000 5,054 0 0 0 0 0 York Cityresident,yourstateand cityincometaxwas$60,000. As anexample,let’ssayyoufileajointreturnandyourincome AMT taxableincomeishigherthanyourregularincome. AMT. Thereasonforthisisthatwhenyoupaystateandlocal •  •  •  •  •  to theAMT next year: taxed at the regular tax rate of 39.6% but expect to be subject You are not subject to the AMT in the current year and will be 20%) because you are not allowed a deduction for stateand you tobesubjecttheAMT,eventhoughbotharetaxedat your regular tax would be $108,000. Your AMT liability would tax tip after the $60,000 deduction. At the maximum tax rate of 20%, Long-term capitalgainsandqualifyingdividendincomecancause Ignoring all other deductions, exemptions, phaseouts and rate taxes arenotdeductiblein computing yourAMT.Therefore, taxes ontheincome,whichreducesyourregulartaxliability,these be $120,000($600,000taxed atthesamemaximumrateof maximum taxrateof20%forregularpurposesandthe differentials, yourregulartaxable incomewouldbe$540,000 only includedalong-termcapitalgainof$600,000and,asNew of theshares atthetimeofexercise over theexercise price. will result inanAMT liability basedonthefair market value regular taxandtheAMT. Inthefollowing year, any exercises this year upto theextent ofthebreak-even pointbetween your shares before theendofyear. The exercise willbetax-free Review your ISO awards to determine ifyou canexercise any following year to take advantage ofthelower AMT rate. Defer ordinary income, suchasbonusesifpossible, to the ordinary taxrate inthecurrent year. as charitablecontributions, to gain thebenefitofhigher Prepay deductionsthatare deductibleagainst theAMT, such you would otherwisepay onApril15ofthefollowing year. due onyour current year’s state/local income taxreturn that by December 31,aswell asany projected remaining balance Prepay your state and fourth-quarter local income tax estimate the taxbenefitnext year. to get thefulltaxbenefitincurrent year rather thanlose Prepay deductionsthatare notdeductiblefor AMT purposes 6 INCOME CAN PUTYOU INTO THEAMT LONG-TERM CAPITAL GAINS ANDQUALIFYING DIVIDEND 5 would not create an AMT credit since none of the adjustments AMT credit from thesedeductions.The AMT illustrated inTax Tip and investment fees, are calledexclusion items. You cannotget an of ISOs. Otherdeductions,suchasstate andlocalincome taxes passive activity adjustments and the tax preference on the exercise The mostcommon deferral items are depreciation adjustments, based on“deferral items” thatcontributed to your AMT liability. regular tax in asubsequent year. You qualify for an AMT credit If you pay the AMT, you may be entitled to a tax credit against your AMT CREDITCAN REDUCEFUTURETAXES • You are notsubjectto theAMT ineitheryear: deductions. depreciation. See the chapter on business owners and depreciation same undereithertaxcomputation. Specialrulesapplyfor bonus However, over the life of the asset the total depreciation will be the and methodfor AMT purposesthenusedfor regular taxpurposes. ference is a deferral item if it is calculated using a different asset life regular taxandAMT purposes.Asanexample, adepreciation dif over time you will end up with the same total deductions for both The reason adeductionisclassified asadeferral item isbecause are deferral items. Tax onnetinvestmentincome,consideration shouldbegivento Keep inmindthatifyouaresubject totheMedicareContribution If youfindyourselfinthistaxsituation,avoidpayingyourstateand the 20% rate, sincethereisalsoa15%rateapplied up to certain taxes (anadditionalcostof$12,000).Keepinmindthatnotall income eveniftheyarenotdeductible forAMTpurposes. income thresholds. paying expenses that are allocableinarrivingat net investment receive afederaltaxbenefit. possibility thatyouwillnotbeintheAMTand may therefore local incometaxesintheyearofsale.Toextentpossible, local incometaxes.Therefore,youwouldpaythehigherof2 consider deferring the payments until next year if there is a of thelong-termcapitalgains(regularorAMT)willbetaxedat your taxexposure. planning strategies for year-end planningideasthatcanminimize regular taxliability inthecurrent year. Turn to thechapter ontax You have avoided theAMT, butyou stillwant to reduce your -

alternative minimum tax 25 EisnerAmper 2017 personal tax guide 26 *For regulartaxpurposes, themedicalexpensethreshold is7.5%foranytaxyearbeginning afterDecember31,2012andbefore January1,2017 for taxpayerswho haveattainedage65forcloseofsuch year.Thethresholdincreasesto 10% forallbeginningJanuary1,201 7. Net operatinglosses(subjecttodifferent AMTrules) 2010 Interest onprivateactivitybonds issued before2009andafter Passive activityadjustments business stock Gain orlossondispositionofcertainassets,includingsalesmall Depreciation (subjecttodifferentAMTrules) value exceedstheexerciseprice) Exercise ofincentivestockoptions(totheextentfairmarket Medical expenses on otherdebt,suchasinvestmentinterest. subject totheinteresttracingrulesdetermineifdeductibleas over $100,000isnotdeductibleasmortgageinterest,butthedebt Note: • • Mortgage intereston: Employee businessexpenses(W-2) Investment advisoryfees Charitable contributions Investment interestexpense (State orlocalsalestaxexciseonpurchase) Qualified MotorVehicleTax Real estatetaxes(personal) State andlocalincometaxes(non-business) Description AMT VS. REGULAR TAX residence Equity debt(upto $100,000) notusedto improve your buy, build,orimprove your residence Qualified acquisition andequity debtupto $1,000,000 usedto Interest on acquisition debt in excess of $1 million and equity debt Interestonacquisitiondebtinexcessof$1millionandequity in excess of10% ofAGI*

Regular Tax Deductible inComputing • • • • • • • • • •

AMT • • • •

Taxable for AMT Only •

Other AMT Differences 3 chart • • • • •