Did you find yourself in the "AMT zone" this year? Did you lose a lot of valuable deductions, perhaps for your children or those big state income and property tax bills?
Did you get clipped by the 26% flat tax rate (28% if you made more than $175,000), punting away the more favorable 10% or 15% graduated brackets?
Maybe you got caught; maybe you didn't. Perhaps the temporarily higher AMT, or alternative minimum tax, exemption was your 2006 "get out of AMT free" card -- you know, that complex deduction bucket for which, once filled, no other deductions need apply.
In 2006, the exemption was $62,550 for married couples, $42,500 for singles. Unless Congress acts, in 2007 the exemption returns to $45,000 for couples, $35,750 for singles. And credits such as dependent care and education won't work anymore, either.
As a result, the Tax Policy Center estimates that some 23 million taxpayers might get hit by AMT in 2007. That's up from 3.5 million in 2000. And by 2010, 90% of all families earning between $75,000 and $100,000 will be in the AMT zone.
For sure, the law of unintended consequences has enjoyed no finer hour.
And so here you are, staring 2007 in the face, wondering, "What can I do avoid the AMT this year -- especially if Congress doesn't extend the higher exemption?" It's the kind of move readers of
The Millionaire Zone
Click here for the video version of this story from Jennifer Openshaw.
The mechanics of AMT are too involved to fully explain here. Instead, I'd like to share three defensive strategies. You might be able to plan your way out of the AMT zone for 2007 and future years -- or at least, every other year.
- Plan your income, where you can. Some taxpayers -- notably business owners and especially those operating on a cash basis -- can adjust how much income they receive and when they receive it by adjusting billings and collections. Now this doesn't change total income over the long haul. But like some of the other strategies I'll show, you may fall into the AMT zone just every other year, especially if you're close to the line. That's better than every year, right?Capital gains are another lever. Capital gains can trigger AMT by reducing the exemption amount. The exemption amount phases out by 25 cents per $1 of income over $150,000 (married filing jointly), so a big capital gain on top of ordinary income can slice deductions allowed under AMT. If possible, spread stock or other capital assets over a few years by modifying the timing of sales or using an installment sale. Or, if you have a really big gain, take it all in one year to avoid the AMT hit year after year. And some of you have incentive stock options. When used to purchase shares, the difference between the market and exercise price is recognized as income for AMT purposes. So, as with capital gains, smooth out exercises to help stay out of the zone.
- Adjust adjustable deductions. Like income adjustments, you can time some big bills to push deductible items from one year to the next, such as property tax and state and local income tax payments.These taxes are due in a given year, but you have flexibility for when you pay them. State income taxes can be paid in the tax year (let's say 2007) or by an estimated tax payment as late as January 2008. Now, you might incur some late payment penalties from your state, but they're likely smaller than the AMT bite.Similarly, most property tax billings can be pulled up. You may have to remove property tax payments from your mortgage payment to get control. Effectively, if close to the line, moving these expenses around can get full deductions in your non-AMT years, which might end up being every other year.
- Move to another state. OK, a last desperate measure, maybe. Yet folks living in expensive coastal locations, especially in the East, are often set up for AMT. States such as New York, New Jersey, Connecticut and Massachusetts have high property taxes and substantial state and local income taxes, too.A move to one of the seven states with no income tax at all -- Florida, Texas, Nevada, South Dakota, Washington, Wyoming and Alaska -- can really cut AMT exposure. But the list of AMT-resistant states doesn't stop there: Delaware, Tennessee, Arizona, Alabama and Virginia have relatively low combined income and property tax burdens.
Now, it probably doesn't make sense to pack up and move or make a poor business decision or stock-sale choice solely because of AMT.
But if you can avoid AMT without knocking the rest of your life off track, by all means go for it.
Jennifer Openshaw, a passionate advocate for helping Americans improve their finances and build their personal fortunes, is CEO of
The Millionaire Zone and America Online's personal finance editor. In addition to appearing regularly on TV shows such as "Oprah" and "Good Morning America" and on CNN, Openshaw is host of ABC Radio's "Winning Advice" and serves as an adviser to some of America's top corporations. Her new book,
"The Millionaire Zone," will hit bookstores in April 2007.