subject: Year-end Tax Planning - Accelerating Or Deferring Income To Minimize Your Alternative Minimum Tax [print this page] At year-end many articles are written about accelerating or deferring deductions. The sometimes-overlooked question of accelerating or deferring income deserves just as much attention' especially for those in the Alternative Minimum Tax. This article will look at what needs to be considered in planning around income recognition' including a summary of the different types of income to which this planning can apply.
Comparing tax brackets
Tax brackets for the Alternative Minimum Tax are progressive' as are those of the Regular Tax. For 2012 the Regular Tax has six brackets' ranging from 10% to 35%' while the AMT has just two - 26% and 28%. For AMT payers' however' the stated brackets are directly affected by the AMT exemption phaseout.
For a married couple' the phaseout begins at $150'000 and doesn't stop until their income exceeds $440'000. Within this range' each incremental $100 of income will result in a loss of $25 of the AMT exemption. The result is that a 28% Alternative Minimum Tax bracket is increased by a factor of 25%' resulting in an effective AMT tax bracket of 35%!
Knowing one's effective tax bracket is the way to do proper AMT planning. It can be a costly mistake to deliberately accelerating income' thinking one is in an Alternative Minimum Tax bracket lower than the Regular Tax bracket' only to find out this actually is not the case. Many year-end tax planning articles routinely suggest that people in the AMT do exactly this' but without knowing what your effective AMT tax rate is it could instead turn out to be a costly mistake.
The types of income can be accelerated or deferred
- Employee bonuses and stock options
Employers may allow employees the choice of taking their bonuses currently or deferring them. Employees also may be granted stock options' and these can be exercised in December or in January. For nonqualified stock options' taxable income will be recognized immediately on the date of exercise - both for the AMT as well as Regular Tax purposes. For qualified options (commonly known as incentive stock options' or ISOs)' there is no taxable income on the date of exercise for Regular Tax purposes' but there is for the Alternative Minimum Tax.
- Business income
A cash-method business could pay outstanding bills in December to reduce income' or wait to pay them in January' and this directly affects the amount of income reported on the business owner's tax return. The business also could hold off from sending out certain bills out towards the end of the year' postponing income into the following year.
- Investment income
Capital gains - an individual controls the timing of any sales of investments' so capital gains could be recognized this year or next.
Rental income - a landlord might ask that the rent that is due on January 1st be paid in this year or next.
Interest and dividends - an individual can shift between bonds and dividend-paying stocks to affect the amount of interest and dividend income received.
Conclusion
Knowing what tax bracket you are in is critical to tax planning. An effective way to minimize the AMT is to look at the options available in terms of what income might be moved between 2012 and 2013' and then to figure out which of these choices will result in the lowest tax burden. With year-end rapidly approaching' it's definitely time to get out the calculator!
