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Year-end tax strategy: Stop the AMT in its tracks

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in Small Business Tax

The alternative minimum tax (AMT) continues to expand its reach below the upper crust of taxpayers. Millions will be hit by the AMT this year.

How it works: When you file your ’08 return, you must perform a complex calculation—including certain “tax preference” items, technical adjustments and an exemption amount based on your filing status—to arrive at AMT liability. Then compare the result to your regular income tax liability. In effect, you pay the higher of the two. The AMT rate is 26% on AMT income up to $175,000; 28% above that.

Strategy: Estimate AMT liability for 2008. If you’re going to be victimized this year, you might reduce or eliminate the tax hit by postponing tax preferences to 2009 or avoiding them altogether.

On the other hand, if you’re absolutely certain you’ll have to pay the AMT in 2008 and you’re in a regular tax bracket above 28%, you may want to accelerate some taxable income into this year. Reason: The extra income will be taxed at a rate no higher than 28% as long as your AMT bill still exceeds your regular bill.

Tip: The AMT exemption amounts have been “patched” again for 2008.

Will a 'bump' save you from the AMT?

As expected, Congress increased the AMT exemption amounts for 2008 just prior to the national election. The new figures show a slight bump over the prior year. The chart below indicates the exemption amounts from 2000 to present.

Filing                            2001–       2003–
status        2000         2002          2005        2006         2007          2008

Joint          $45,000    $49,000    $58,000    $62,550    $66,250    $69,950   
Single       $33,750    $35,750    $40,250    $42,500    $44,350    $46,200

Tip: The exemption amounts phase out for high-income taxpayers. It is reduced by 25 cents for each $1 of AMT income above $150,000 for joint filers; $112,500 for single filers. The exemption phaseout thresholds have not been adjusted for inflation.

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