2014-15 tax guide
Download the PDF to view the whole guide
See other sections of the guide.
The alternative minimum tax (AMT) can feel like a penalty for financial success. It’s hiding in the tax code ready to sweep away tax benefits for high-income taxpayers.
What is the AMT? It is essentially a separate tax system with its own set of rules. How do you know if you will be subject to it? Each year you must calculate your tax liability under the regular income tax system and the AMT, then pay the higher amount. Fortunately, the AMT brackets, exemption phaseouts and exemptions are now permanently indexed for inflation.
The AMT is made up of two tax brackets: 26% and 28%. Many deductions and credits aren’t allowed under the AMT, so taxpayers with substantial deductions that are reduced or not allowed under the AMT are stuck paying the AMT. Common AMT triggers include the following:
- State and local income and sales taxes, especially in high-tax states
- Real estate or personal property taxes
- Investment advisory fees
- Employee business expenses
- Incentive stock options
- Interest on a home equity loan not used to build or improve your residence
- Tax-exempt interest on certain private activity bonds
- Accelerated depreciation adjustments and related gain or loss differences on disposition
Proper planning can help you mitigate, or even eliminate, the impact of the AMT. The first step is to work with your local Grant Thornton tax professional to determine whether you could be subject to the AMT this year or in the future. This will be easier now that the brackets and exemptions are automatically indexed for inflation. In years that you’ll be subject to the AMT, you may want to defer deductions that are erased by the AMT and possibly accelerate income to take advantage of the lower AMT rate.
Capital gains and qualified dividends deserve special consideration for the AMT. They are taxed at the same 15% and 20% rates under either the AMT or regular tax structure, but the additional income they generate can reduce your AMT exemption and result in an effective rate of 20.5% instead of the normal 15% (or 25.5% for capital gains in the 20% bracket). So consider the AMT as part of your tax analysis before selling any asset that could generate a large gain.
Planning tip: Zero out the AMT
You have to pay the AMT when it results in more tax than your regular income tax calculation, typically because the AMT has removed key deductions. The silver lining is that the top AMT tax rate is only 28%. So you can “zero out” the AMT by accelerating income into the AMT year until the tax you calculate for regular tax and AMT are the same.
Although you will have paid tax sooner, you will have paid at an effective tax rate of only 26% or 28% on the accelerated income, which is less than the top rate of 39.6% that is paid in a year in which you’re not subject to the AMT. But be careful. If the additional income falls into the AMT exemption phaseout range, the effective rate may be a higher 31.5% (because the additional income will be reducing the amount of exemption you can use). The additional income may also affect other tax benefits, so you need to consider the overall tax impact.
Planning tip: Elect to capitalize carrying costs
The tax law allows you to elect to capitalize, rather than immediately deduct, certain types of carrying costs on investment property. A common example is real estate taxes on raw land held for investment. For regular tax purposes, these real estate taxes are typically deducted on Schedule A as an itemized deduction, but are not deductible for AMT purposes. So, if you’re paying AMT, the Schedule A deduction of the real estate taxes may provide no tax benefit. You should consider electing to capitalize some or all of the investment-related real estate taxes (and other eligible carrying costs). These capitalized costs will increase your basis in the investment property, reducing the taxable gain when the property is sold.
+1 602 474 3410
+1 202 861 4144
Tax professional standards statement
This document supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the subject of this document, we encourage you to contact us or an independent tax adviser to discuss the potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this document may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this document is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.