“Why was my 2011 tax liability so high this year?” was a question asked by many taxpayers when their CPAs presented them with their 2011 tax returns. CNBC reported that the “AMT will trap more taxpayers in 2011 than at any time in its 42-year history”. The Tax Policy Center estimated that 4.3 million taxpayers are expected to pay the AMT in 2011 and that the majority of those taxpayers will be making under $200,000. The AMT continues to trap more middle income taxpayers each year. If Congressional Budget Office forecasts are correct, in 2012 “nearly every married taxpayer with income between $100,000 and $500,000 will owe some alternative tax.” The AMT trap has widened because it has never been indexed to inflation. So as incomes rise, taxpayers are finding themselves paying a tax that supposedly was targeted for the rich. An AMT rate of at least 26 percent, and in some cases 28 percent, is imposed on AMT preference and adjustment items. In view of the serious risk of AMT exposure, careful planning to reduce an individual’s overall tax bill is very important.
Although the AMT is a significant concern, tax planning should not focus solely on eliminating AMT liability. Due to the complexity of the interrelationship of the AMT and regular tax systems, concentration on lowering minimum tax liability alone could easily result in an unwanted increase in your regular income tax liability.
In general, the best way to handle AMT liability is careful planning involving the coordination of future regular income tax and AMT, using accurate projections of income, expenses, and deductions over multiple years with several alternative scenarios. An overall plan must then be devised to manage your AMT liability without raising regular tax liability. The unknown factor of future income tax rates could possibly undermine the best tax planning projection scenarios.
Note: Portions of this posting have been reproduced with permission from CCH Incorporated.