First Person: The Alternative Minimum Tax Could Steal Your Refund

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A recent Washington Post article (www.washingtonpost.com/alternative-minimum-tax/2012/11/04 sounds the alarm about the possibility that the alternative minimum tax (AMT) could hit millions of middle class tax payers in 2012. I hadn't thought too much about the AMT, because I expected Congress to pass at least a one-year patch (as it has done in the past) that would provide taxpayer relief in 2012. That hasn't happened yet, and it is not certain that it will. If not, tax payers who will be subject to the AMT have a limited amount of time for tax planning to limit the financial hit.

The AMT is calculated differently than the ordinary federal income tax. Some deductions are disallowed under the AMT and replaced with a flat exemption amount. Also, AMT earnings are subject to a special AMT tax rate. The AMT exemption amount will be sharply lower in 2012 than 2011 unless Congress addresses it, and this is why the AMT may affect many more taxpayers. There is more information about the AMT at http://www.irs.gov/.

As I began to think about the AMT, I looked for strategies that I (and other ordinary taxpayers) could use to minimize AMT taxes. Because of the way the AMT is calculated, I looked at two ways I could reduce (or eliminate) its effect: lower my reported income or reduce my deductions.

Lower Income

One way I can minimize the effect of the AMT is to lower my taxable income, and there are plenty of steps I can take to do that. For example, I could postpone receipt of a bonus or of some business income (that is reported on my personal tax return) until January 2013. Also, I could increase tax deductible contributions to my retirement plans, and I could book capital losses on stocks or other assets (which can be used to offset income from capital gains or, if these losses exceed gains, to reduce ordinary income by up to $3,000).

Reduce Deductions

The AMT calculation excludes some deductions (for those who itemize), including deductions for state and local taxes, property taxes, and medical expenses. There are other deductions that are affected, but those I've mentioned are the ones most likely to affect taxpayers like me. Here are some steps I can take to reduce these deductions this year.

First, if I can delay some compensation income until next year, I also would delay payment of applicable state and local taxes.

Second, I could delay state and local tax payments, which I otherwise might make in 2012, until early 2013.

Third, I could postpone year-end property tax payments until 2013.

Fourth, I could delay come discretionary medical expenditures until 2013.

Plan Now

While it is uncertain whether Congress will address the AMT before yearend, I am thinking about related tax planning strategies now because many of these actions have to be taken in 2012 to work. I also won't be looking at the AMT in isolation, since, based on what the Presidential candidates have promised, there may be significant tax law changes next year. Given these many uncertainties, I find tax planning in general, as well as for the AMT, particularly difficult now and may contact my accountant before making any changes.

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