As the tax filing deadline approaches, many clients may think it is too late to reduce their tax bill and possibly avoid the alternative minimum tax. If you have shared tax-savings strategies with clients, now may be a good time to check in to see if they have followed up on them, before they complete their final tax filing.
In the near term, reducing taxable income is the main strategy to consider, and clients may not realize there is still time. Ask these questions:
- Have they taken full advantage of contributions to individual retirement accounts?
- Are they taking advantage of catch-up contributions allowed after age 50?
- For small business owners, have they funded their SEP-IRA?
While there may be limited actions that can be taken and applied to the 2011 tax year, it makes sense to plan ahead for the AMT in 2012 before next tax season. Especially since the current exemption levels will change for 2012 unless Congress takes action. In fact, according to the Tax Policy Center, if Congress does not act, more than 31 million taxpayers are likely to be subject to AMT in 2012.
Still, there are strategies that clients may employ to try to avoid
Clients may consider:
- Municipal bonds, which may help to minimize taxable income
- Consulting with a tax professional before exercising certain stock options (ISOs), which may increase the chance of being subject to AMT
- Deferring certain deductions such as those for property taxes or medical payments in a year when the client will not owe AMT
- Delaying large capital gains, which may reduce the AMT exemption amount for taxpayers (although, with the prospects of the maximum, long-term capital gain tax rate increasing to 20% next year and even higher for those subject to the new 3.8% Medicare surtax on investment income, some clients may wish to accelerate capital gains in 2012)
- Accelerating income with a Roth IRA conversion (For taxpayers subject to AMT, additional incremental dollars of ordinary income up to a limit are taxed at a maximum rate of 28%.)
Download our Understanding the AMT investor education piece for more information.
Capital gains, if any, are taxable for federal and, in most cases, state purposes. Income from federally tax exempt funds may be subject to state and local taxes. Funds that invest in bonds are subject to certain risks including interest-rate risk, credit risk, and inflation risk. As interest rates rise, the prices of bonds fall. Long-term bonds are more exposed to interest-rate risk than short-term bonds. Unlike bonds, bond funds have ongoing fees and expenses. The fund may invest significantly in particular segments of the tax-exempt debt market, making it more vulnerable to fluctuations in the values of the securities it holds than a fund that invests more broadly.