How to Avoid the Alternative Minimum Tax

The alternative minimum tax is a system applied by the United States government on individuals, corporations, trusts and estates. It works different from the regular tax system, and incorporates a flat rate. It was first enacted in 1969 in order to ensure that higher income bracket earners pay their due share in taxes rather than gaining tax benefits as a result of various sorts of deductions.

However, with the AMT not indexed to take into account inflation, the process also affects middle-income earners as well. You will need to calculate your tax payments under both systems, regular and AMT, and pay out the larger of the two.

For instance, if you estimated the tax amount under the normal system to be say $15000, and further calculate it through AMT, which is $10,000, then you will be paying $15000. Moreover, if the amounts are reversed, still you will be paying $15000, thus affecting your consumption power.

Despite the system showing changes by accounting factors such as inflation, it is hard to gauge whether the middle-income earners will be protected. For instance, exemptions under AMT for married couples filing jointly was $40,000 in 1982. However, the amount adjusted for inflation in 2011 was $95,120. The amount further varies under the Tax Relief Act 2011.

Therefore it is important to prepare and plan your income streams as they come, rather than when the times come to pay taxes.

Instructions

  • 1

    Reduce personal exemption

    In regular cases, the more the personal exemptions, the less liabilities you will need to pay as taxes. However, it is important to limit your personal exemptions under AMT as more will be put at risk under this scenario.

  • 2

    Keep in check your medical expenses

    Make sure that your medical expenses do not exceed 10% of your adjusted gross income. Adjust your medical bills in order to avoid any undue exposure. One can further sign up for a pre-tax deduction plan to ensure a reduction in the medical expenses applicable on your salary.

  • 3

    Avoid income bracket

    One can always adjust his or her salary in order to avoid certain income ranges i.e. falling below $150,000 or over $ 415,000.

  • 4

    Home equity and other financial gains

    Avoid taking out home equity loans other than for buying or revamping your residence. Moreover, sell some of your long term gains to limit being qualified under AMT.

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