Investment Management

Helping Clients Plan for the AMT

Clients dread the Alternative Minimum Tax, but you can build their trust by learning how the tax works, what triggers it, and when to call tax professionals for help.

The Basics:

  • Every taxpayer is required to calculate AMT (instructions in IRS Form 6251), to determine if there are too many "tax preference items" excluded from regular taxable income.
  • AMT picks up where tax deductions leave off, meaning the following items are included in the AMT calculation and may trigger the additional tax:
    • Itemized deductions (especially real and personal property taxes with rises in assessments)
    • Timing differences (if accelerated depreciation and deferred recognition of income are used to reduce current income tax)
    • Incentive stock options (ISOs)—the excess of the underlying stock’s fair market value over its option price on the date of exercise
    • Tax-exempt income from "private activity bonds"
    • Long-term capital gains, which counts as income for AMT purposes

How to tell if your client is affected—some warning signs:

  • Large number of exemptions for dependents
  • Large state and local tax deductions
  • Interest on second mortgages
  • Large miscellaneous itemized deductions
  • Large tax credits
  • Long-term capital gains
  • Large tax-exempt interest

Things to help reduce tax burden:

  • Evaluate how much “private activity bonds” are in the municipal bond portion of the portfolio. Mutual funds identify this percentage at year end. Some funds, like Voya National Tax-Exempt Bond Fund, seek to hold no bonds subject to the AMT
  • Consider the timing of long-term capital gains, including spreading out sales over a series of years to avoid the AMT trigger
  • To reduce ISO triggers, time an exercise over a period of years, exercise only currently held shares, or use stock option reloads
  • Clients who are in an AMT position one year, but not the next, may want to accelerate income and defer deductions
  • If clients expect to pay the AMT continually, they should evaluate the pros and cons of incurring home equity interest
  • Convert passive losses to income-producing passive activities (since AMT treats them the same)
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