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Alternative minimum tax: year-end tax strategy

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The alternative minimum tax (AMT) was originally designed to ensure wealthy individuals don’t get off scot-free. But the AMT is now hitting a greater percentage of middle-income taxpayers.

After jumping through the hoops of a complex calculation—involving certain tax preference items, an exemption based on tax filing status and other technical adjustments—you must compare your AMT liability to your regular tax liability … and pay the higher of the two.

If the AMT applies, the tax rate is a flat 26% on AMT income up to $175,000. Once you exceed the $175,000 level, the AMT rate is 28%.

Estimate your AMT liability. If you can avoid the AMT by shifting tax preference and adjustment items into next year, do it. On the other hand, if you can’t escape the AMT this year, accelerate income into 2010, assuming your regular tax bracket is higher than 28%.

Reason: The additional income you receive this year will be taxed at either 26% or 28%—lower than your top marginal regular tax rate for 2009.

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