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Lowering the Impact of the Alternative Minimum Tax

23rd November 2009
By Chintamani in Taxes
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Two things strongly factor into the formula for the Alternative Minimum Tax. One is the type of investments you have. Some investments figure more consequentially in the Alternative Minimum Tax. Therefore, the structure of your portfolio is very important in determining how much or how little the Alternative Minimum Tax will affect you. The second factor is, of course, the amount of your investment.

Investors earn income on dividends, interest, capital gains, partnership, or real estate investments. This income is variable depending on the amount of cash, bonds, stock, and other investments in your portfolio. There are things that can be done to soften the impact of the AMT.

Try and adjust the timing of certain income factors such as implementing stock options and selling stock. Controlling the timing of income and the amount of income can drastically affect this tax system.

While it is true that you cannot change the timing of interest income, an investor could, conceivably, change the amount of dividend income earned by changing the strategy of investing. Please note that some income that is not taxable under regular taxes is taxable under the AMT.

Capital gains can seriously impact your Alternative Minimum Tax exemption. Always consider the implications of the this tax before you decide to realize any capital gains.

Seriously consider your state and local tax load. State taxes play a large role in determining Alternative Minimum Tax because under the AMT, state taxes are not deductible. Some states like New York, Massachusetts, and California have particularly high taxes. Other states, like Texas, Nevada, and Florida have lower taxes. Living in a state with lower taxes will help you to more easily avoid the AMT.
If you are an employee and you can defer the payment of bonus monies from one year to the next, this will definitely help you with the AMT. The more standard income, from salary or hourly wages, an individual has, the more they will be pulled away from the Alternative Minimum Tax. Some employees are paid a commission along with their other forms of income. Commission income should be studied to determine if it could be timed in a fashion to aid in planning for the AMT.

Some employee business expenses can affect the Alternative Minimum Tax. Before accepting any employer reimbursements, figure out how it will affect you in regard to the AMT. Perhaps you and your employer might work out an alternative.

It is strongly suggested you consult a financial planner or tax expert to help you soften the blow of this tax on your tax liability status.
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About the Author
Occupation: Tax consultant
Chintamani Abhyankar, is a well known expert in the field of finance and taxation for last 25 years. He has written many books explaining inside secrets of the magic world of personal finance. His famous Tax eBook “Stop donating your money to IRS” which is now running in its second edition, provides intricate knowledge and valuable tips on personal finance and income tax.
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