What should I do if I am in alternative minimum tax (AMT)?

Contrary to popular belief, there are actions you can take to help reduce your income tax exposure if you are in AMT or close to it. First, you need to determine if you are in or close to AMT in the current year. Second, you want to determine if you will be in AMT next year (using estimated figures for next year). The reason you want to calculate both years is that often what exposes you to AMT in one year does not exist in the following year. There are strategies you can implement to minimize your tax liability over a couple of years.

There are too many factors affecting whether you are in AMT to list here, but most taxpayers find themselves in AMT because of state income taxes, property taxes, and miscellaneous itemized deductions.

For the sake of discussion, let's assume that it's only state income taxes, property taxes and miscellaneous itemized deductions that are affecting the AMT tax calculation.

You are not in AMT this year, but you expect to be next year

This is the most common AMT opportunity. It usually involves high income in the current year or low state income taxes, property taxes or miscellaneous itemized deductions compared to what you expect for next year. Here are some steps you can take:

  • Consider paying some or all of the state taxes by yearend, if you expect a higher income in the current year
  • Consider prepaying a portion of your property taxes that will become due in early next year.
  • Consider prepaying some miscellaneous itemized deductions, too, in the current year. Remember, if you wait until next year, you may receive no tax deduction at all, because AMT disallows them.

You are in AMT this year, but you don't expect to be next year

Here are some precautionary steps you can take:

  • Try to hold off paying some miscellaneous itemized deductions or state income taxes until next year—be careful to weigh this against potential penalties for underpayment of state income taxes.
  • Find out if your employers (or clients) can either provide the extra income this year or break up the income to work the AMT exposure to your benefit.

You are in AMT this year AND next year

  • Do your best to postpone additional deductions until the year following if possible.
  • This not only postpones the cash payment, but it also allows more time for you plan around AMT for the next year. Who knows? That big-ticket income item might be just around the corner.