The Alternative Minimum Tax (AMT) will affect an additional 27 million taxpayers in 2012 if Congress fails to act and amend the income guidelines by the end of the year.
Asking your clients if they have consulted with a tax preparer about the possible impact of the AMT provides an opportunity for you to discuss tax strategies for their investments.
Last year, an AMT exemption was enacted to include couples earning $74,450 and individuals earning $48,450 or less. If Congress does not act, the exemption amounts would revert back to levels that were in place in 2000 ($33,750 for individuals, $45,000 for couples filing joint returns). Even if a fix is passed, approximately five million taxpayers will be subject to the AMT.
There are a number of alternative strategies that clients may consider to minimize the impact of the AMT.
Municipal bonds may help to minimize taxable income although certain bonds issued on behalf of a local or state government to fund private activities (referred to as private activity bonds) may generate income subject to the AMT. Review your client’s municipal bonds or funds to determine if there will be any income generated that will be subject to the AMT. There may be better alternatives for clients who expect to be subject to the AMT.
Another strategy is to defer certain deductions, such as those for local property taxes and medical payments, in a year when the client will owe the AMT. And for some clients who will definitely be subject to the AMT, you may want to discuss strategies to accelerate income, such as a Roth IRA conversion. For clients who are subject to the AMT, once they’re in the AMT system, additional incremental dollars of ordinary income (up to a certain limit) are taxed at a maximum rate of 28% versus the maximum federal ordinary income tax rate of 35%. Affluent clients who expect to be at or near top tax brackets in the future or feel overall tax rates will be significantly higher, may view 28% as an attractive tax rate for adding income right now.
In addition to working with your client, initiating the tax discussion may provide an opportunity for you to network with local CPAs.
Download our Understanding the AMT investor education piece for more information.