The alternative minimum tax or AMT is designed to make up for gaps in personal taxation and it can add quite a bit to your personal tax bill.
If you’re at risk of having to pay the alternative minimum tax, there are a number of steps you can take to reduce the amount you have to pay.
With some tax planning, you can reduce the size of the AMT bite. Since the AMT rules allow for fewer deductions, often eliminating the standard deduction, personal exemptions and other taxes, consider these tips to minimize your AMT tax bill.
How to Minimize AMT
- Maximize Retirement Contributions to Employer Plans. One of the most effective ways to minimize your alternative minimum tax is to contribute the maximum amount to employer retirement plans. If your employer offers a 401(k), a 403(b) or a 457 (b) plan, contribute as much as you can each year, up to the 401k limits. The amount you contribute is tax deferred and will reduce your taxable income for the year.
- Reduce AGI. Your adjusted gross income will impact the amount of your AMT. If you can reduce this adjusted gross income as much as possible, it reduces the possibility of having to pay the alternative minimum tax. If you are self-employed or a business owner, you have the opportunity to reduce your adjusted gross income substantially with various business deductions. For ideas to lower your AGI, see the list of AGI adjustments.
- Use Tax Efficient Funds or Tax-Exempt Bonds. If you are an investor, you need to put your money into securities and investments that will minimize your tax liability. When you invest in mutual funds, be sure to choose funds that are known for being tax efficient. If they generate large amounts of capital gains taxes and dividends, your AMT tax liability could increase. Another option to consider is putting money into municipal bonds, which are tax-exempt. These bonds are issued by municipalities such as school districts, city governments and airports. The interest you earn is not taxable.
- Claim Itemized Deductions Instead of the Standard Deduction. When you file your tax return, you have the choice of claiming a standard deduction or taking itemized deductions. Usually you should take the higher deduction, however, the standard deduction isn’t allowed under AMT. Therefore, taking itemized deductions gives you a chance to decrease your taxable income under AMT. While it may take a little bit more time to itemize your deductions, it can pay off by reducing the possibility of having to pay the alternative minimum tax.
- Make Additional Charitable Contributions. Another way that you could reduce your alternative minimum tax liability is to make additional charitable contributions. When you make contributions to a qualified charitable organization, you can deduct the amount of your contribution from your taxable income. For example, giving money to a church or a local charity will provide you with a deduction. When you make a charitable contribution, make sure that you get a statement or a receipt from the charity so that you can prove you made the donation. Donations of physical property are also deductible based on their fair market value as well.
- Claim Business Expenses on Schedule C. When you have business expenses to claim, consider putting them on Schedule C instead of on Schedule A of your tax return. By putting them on Schedule C, you reduce your adjusted gross income. This method also ensures that none of the deductions will be eliminated by the alternative minimum tax that you could otherwise have to pay on your income. For example, the AMT will eliminate real estate taxes on Schedule A. However, if they are a part of your business expenses on Schedule C, they will be allowed.
Regardless of your situation, you may have to pay at least something in the alternative minimum tax. You can see your AMT liability using the tax calculator. However, you can take the necessary steps to reduce this amount with a little bit of careful planning. Sit down at some point in the year and contemplate ways that you can implement some of these suggestions to limit your tax liability.