Alternative Minimum Tax Planning - Importance of Controlling Your Income Investors

Here is a checklist of different types of income, as specifically applicable to the category of taxpayer known as Investors. The other categories - Employees, Small Business Owners & the Self-Employed and Retirees - will be discussed in future articles. Keep in mind, however, that any one taxpayer may fall in more than one of these categories.

The income investors generate includes interest, dividends, capital gains, and income from real estate or partnership investments. These obviously vary depending on the investor's portfolio allocation among cash, stocks, bonds and other types of investments. The important issues are to what extent the timing of investment income can be controlled and/or the type of investment could be changed.

Interest income generally cannot be timed. Whether you have savings accounts, money
market funds, certificates of deposit (CDs), bonds or bond mutual funds, you must include in income the interest earned each year. For United States savings bonds the default is to tax the income at maturity, but a taxpayer can instead elect to recognize the interest as it is earned each year.

Dividend income similarly cannot be timed, but an investor is able to alter the amount of
dividends earned by changing investment strategies. For example, an investor with a
portfolio of growth stocks versus dividend-paying stocks will have less in dividend income. This past year many companies cut back the amount of dividends they are paying, so this also must be taken into account in your tax planning.

Capital gains are almost entirely controllable. A taxpayer holding individual stocks has no taxable income from any appreciation in the value of the stock until it is sold, and the timing of the sale is entirely within the taxpayer's control. While tax planning should not trump good investment planning, the two should always be considered together. Many taxpayers look at their tax situation when deciding whether to make any year-end sales. Being in the AMT is an important part of one's tax situation.

Taxpayers generally do not have control over year-end capital gain distributions from mutual fund investments, but the type of mutual fund invested in certainly is controllable. If, for example, large year-end capital gain distributions are causing you to pay the AMT because of the exemption phase-out, changing to an index fund or a more "tax-efficient" mutual fund should result in a decrease in the AMT paid.


George Bauernfeind is with AMT Individual - providing information on Alternative Minimum Tax Planning . He writes articles to help the tax payers to pay less Alternative Minimum Tax. He recommend to use Alternative Minimum Tax Calculator to reduce Alternative Minimum Tax.