Under AMT rules, some tax credits and deductions are eliminated. You’ll have to pay the AMT if it exceeds your regular tax liability (before any tax credits).

The AMT has a unique set of rules regarding exemptions, deductions, credits, and tax brackets (i.e., 26% and 28%). Unfortunately, AMT is not inflation-indexed, so it catches more upper-middle-income taxpayers each year due to bracket creep.

Among other things the AMT takes away are:

• Personal exemptions, which hit big families the hardest

• Deductions on itemized personal taxes, such as real estate taxes or state/local income taxes

• Other itemized deductions, including unreimbursed employee business expenses and investment expenses

• The lack of impact from exercising incentive stock options  —  you’ll owe tax on the difference between the purchase and grant prices

• The tax exemption of private activity bonds

We are here to help you steer clear of the road to Broke-ville!

The AMT can hurt you if your regular tax bracket is 28% or lower. You’ll know for sure when you figure out your taxes both ways. But you can take steps to tame the AMT, as we’ll now explain.

Use your AMT exemption

Start with your AMT exemption, which may reduce your exposure to the AMT. 

Within your 2022 tax planning efforts, it will help to know that the AMT exemption for single filers is $75,900 and $118,100 for joint filers. The 2022 exemptions phase out when your alternative minimum taxable income (AMTI) exceeds $539,900 (single filers) or $1,079,800 (joint filers and qualifying widows). If you have children subject to the kiddie tax on unearned income with income above $2,200, the excess is taxed at the parent’s tax rate.

Keep your adjusted gross income as low as possible

The soundest strategy for controlling your AMT liability is to minimize your adjusted gross income (AGI), which you determine by subtracting selected adjustments to income (Schedule 1 of Form 1040), including deductions for:

• Student loan interest payments

• Business expenses

• Early withdrawal penalties

• Educator expenses

• Self-employment tax

• Self-employed health insurance costs

• And a few other items we’ll discuss below. 

Your regular taxable income is your AGI minus your deductions.

As part of your year-end tax planning strategies, you can decide to participate in an employer-sponsored retirement account. 

Make the maximum allowable tax-deductible contributions to a qualified employer-sponsored retirement plan, including a 401(k), 403(b), 457(b), or another type of qualified plan, which may include: 

• Defined benefit plans

• Employee stock ownership (ESOP) plans

• Money purchase plans

• Profit-sharing plans

• Salary Reduction Simplified Employee Pension (SARSEP)

• Savings Incentive Match Plan for Employees (SIMPLE)

• Simplified Employee Pension (SEP)

Self-employed individuals can also deduct contributions to a 401(k) or similar plan. Contributions are excluded from your taxable income.

You can use pre-tax contributions to a flexible spending account (FSA).

Employers can set up flexible spending accounts (FSAs) for employees. An FSA provides specific tax advantages when you and/or your employer contribute pre-tax dollars to the account. Your contributions are deducted from your earnings, meaning they are not subject to payroll or income taxes. 

The maximum contribution in 2022 is $2,850 per individual.

The primary purpose of an FSA is to provide reimbursement of qualified medical and dental expenses. Money distributed from an FSA to reimburse qualified medical expenses is not taxable.

You can also participate in a dependent-care FSA to pay for the care of:

• Children up through age 12

• Adult dependents who cannot care for themselves

In 2022 the maximum contribution you can make to a dependent care FSA is $5,000. You must use your FSA funds within a specified time frame or lose your contributions. You cannot take the money as cash, only as a reimbursement for out-of-pocket expenses.

You can use employer-sponsored cafeteria plans.

You can use Section 125 plans to pay for various items on a pre-tax basis. Contributions to a cafeteria plan are excluded from your taxable income and avoid payroll taxes. These plans traditionally include options such as life insurance, health savings accounts (HSAs), disability insurance, and coverage for life event expenses like adoption.

HSAs are popular among consumers enrolled in high-deductible health plans. You fund contributions with pre-tax dollars, thereby reducing your taxable income. Be careful when distributing HSA funds for non-qualified expenses before age 65, or you may have to pay a 20% penalty. 

Money in an HSA doesn’t expire, as is the case for FSAs. Maximum HSA contribution amounts for 2022 are $3,650 for self-only plans and $7,300 for families. The annual catch-up contribution amount for individuals age 55 or older is an additional $1,000.

Other ways to reduce AGI

Take advantage of the tax laws to further reduce your AGI by:

• Switching some of your non-sheltered investment holdings to tax-efficient mutual funds, municipal bonds, and tax-exempt bond funds.

• Do not accelerate real estate tax payments into the following year because the small discount is not worth triggering or increasing your AMT in the new year.

You can take tax credits

Tax credits are better than deductions because they reduce your taxes dollar-for-dollar. You are allowed to offset AMT liabilities by taking nonrefundable personal tax credits, such as:

• Child and dependent care credit: This is a credit for taxpayers who pay out-of-pocket expenses for childcare or the care of disabled dependents while they work or look for work. You don’t have to owe taxes to claim the credit. The credit amount varies by your income and the percentage of expenses you must spend on the care of a qualified dependent. 

According to TurboTax, the credit limit is $3,000 for qualifying expenses (maximum credit of $1,050) for one child or dependent or up to $6,000 for qualifying expenses (maximum credit of $2,100) for two or more children or dependents.

• Foreign tax credit: This is a credit to US taxpayers for offsetting the income tax they pay to foreign countries. The purpose of this credit is to avoid double taxation of US citizens (and residents) who work and pay taxes abroad. You can take this credit by including Form 1116 in your federal income tax return.

• Prior-year AMT payments: You may be eligible for a minimum tax credit if you paid AMT in earlier years.

Fee-only fiduciary investment advisors can help you minimize AMT

If you are retiring in Greenville, SC, we invite you to contact our firm of fee-only retirement financial planners at Global View. Our certified financial planners and investment advisors can show you how to minimize your AMT and keep more of your money for yourself and your family. 

We look forward to hearing from you.