As the end of the year approaches, many taxpayers engage in year-end tax planning to minimize their tax bill for 2011. This year, with widespread tax uncertainty on a number of fronts, year-end planning is more difficult. This is especially so with respect to the alternative minimum tax (AMT). Here is some information to help you plan your year-end moves in light of the AMT.
The AMT is a shadow tax system that started in 1969 to ensure that wealthy taxpayers pay at least some tax. Since then, the system has been transformed, tweaked, and modified, and now affects over 3 million taxpayers annually.
Each year for the past several years, the exemption amounts for the AMT have been increased to maintain the number of taxpayers subject to the AMT. This has been called a “patch.” Without a patch for 2010, the number of taxpayers owing AMT could exceed 25 million. The exemption amounts for 2010 likely will be increased to:
Another important aspect of the AMT patch has been to allow most nonrefundable personal credits to offset not only regular tax but also the AMT. This will likely be part of the patch for 2010. Note: Special legislation is needed to permit the home energy credit for adding insulation, storm windows, etc. to offset AMT in 2010.
If you expect to be free of the AMT in 2010, you can reduce your tax bill by:
The following year-end moves can cause you to become subject to the AMT, so proceed cautiously:
Before taking any year-end action, discuss your personal tax situation with your tax or financial advisor.
An amount taken from income as a prepayment of an individual’s tax liability for the year. In the case of wages, the employer withholds part of every wage payment. Backup withholding from dividend or interest income is required if you do not provide the payer with a correct taxpayer identification number. Withholding on pensions and IRAs is automatic unless you elect to waive withholding.