The alternative minimum tax (AMT) originally targeted the wealthiest Americans, but with Congress failing to act on a major reform on this specific tax law, each year more taxpayers are "caught" in the AMT.
With an estimate of more than 23 million Americans to be possibly affected in 2007, the AMT is now a concern for middle class taxpayers. To the extent that you are required to make estimated tax payment for the fourth quarter, there are actions you can take to potentially keep you out of AMT:
» Know your deductions. There are several items that can push you into the AMT, such as too many ordinary deductions and claiming a large number of dependency exemptions. Remember that deductions for state and local taxes, personal exemptions and real property taxes are not allowed in computing your alternative minimum taxable income.
» Timing of payment. Fourth quarter estimated taxes for 2006 are due by Jan. 15, unless you plan on pre-paying by Dec. 31, which provides you with a current-year deduction. Look at how much "AMT room" you have by comparing your regular income and AMT income — that is, how much more of an AMT add-back deduction you can take without being subject to the AMT. If there is "room," you should consider accelerating all or part of your payments for taxes to get the deductions. Do not pre-pay your taxes if pre-paying will bring you into the AMT.
» Property taxes. In most counties, property taxes are due in two installments — the first one no later than Dec. 10 and the second no later than April 10. You may want to consider pre-paying your second installment in 2006 using the same analysis for state estimated taxes.
» Timing of your income. If you fall under the AMT, your income is being taxed at 28 percent for regular tax purposes. If you don’t, your income is going to be taxed at your marginal tax rate, which could be as high as 35 percent. If you, as a cash-basis taxpayer, have control over the timing of your income, and expect to be in AMT in 2006 but not in 2007, consider accelerating the receipt of your income. Your income will be taxed at 28 percent in 2006 instead of the higher marginal tax rate in 2007. If you are expected to be in AMT for both years, defer your income so that it will not be taxed until 2007, allowing you the use of your tax dollars.
Elizabeth Sevilla is a senior tax director in the San Francisco office of BDO Seidman LLP.