Understanding AMT, Until It Gets Axed!

August 10th, 2017


President Trump is proposing to ax the alternative minimum tax, but for now we can’t ignore it for tax planning.

What is the AMT?

AMT stands for Alternative Minimum Tax. It is a second taxing system that the government runs your returns through to see if adjustment items apply. In most cases, unfortunately, these items will work against you by limiting their benefit – decreasing their deduction and/or increasing the taxes due.

Why am I getting hit with it?

California is a high income tax state. Because of that, you may encounter the AMT sooner than those residents of states with low or zero income tax. Since local & state taxes are one of the adjustment items in calculating the AMT, the IRS’ system will determine if you are receiving too great a benefit. If it determines you are, it will limit your state tax deduction on Schedule A.

Unreimbursed employee expenses are particularly susceptible to AMT, limiting the benefit of the deductions. You may find that your significant unreimbursed employee expenses do not decrease your Federal taxes at all! These expenses can be disallowed by the AMT a the Federal level, but have some minimal benefit at the state level.

Another example of AMT in action is the preference item of Incentive Stock Options. It’s becoming more common for corporations to incentivize their employees through the issuance of options. If you have exercised an option without selling it, you will need to record the difference between the market price at date of exercise and the exercise price you paid. Later, when you sell the option, you’ll need to record the capital gain/loss on the sale. In doing so, you may be hit by the AMT.

How do I get out of it?

This is the tricky part. Unless your tax situation changes quite a bit from year to year, you’ll most likely continue to be stuck in AMT. However, this is where tax planning and strategizing can come into play to potentially help minimize your AMT exposure.

At TaxPlus, we understand the ins and out of the Alternative Minimum Tax…and everything else you might encounter when completing your returns. Call us today at (310) 398-3231 and let one of our professionals help you through whatever tax problem you have.

Find out more at TaxPlus.com