Alternative Minimum Tax Planning - Importance of Differing Levels of Income

If your highest tax bracket under the Regular Tax is higher than your highest tax bracket
under the AMT, what does this mean? It means that by incrementally adding more income, you will be gradually working your way out of the AMT. You can test this and see for yourself the impact on your AMT by changing your ordinary income (not capital gains or qualifying dividends) by $10,000. For example, if you are in the top brackets of 35% for the Regular Tax and 28% for the AMT this additional income would increase your Regular Tax by $3,500 and your AMT by $2,800, which in theory reduces the AMT you pay by $700 - the difference in the brackets times the income.

The actual difference will vary somewhat because of the several other limitations that are affected by any change in income. Specifically, the $10,000 additional income means that, for the Regular Tax, your personal exemptions and itemized deductions are further reduced, and for the AMT your allowable exemption also is reduced. The change that you see to your AMT liability is the $700 as affected by these other variables. Also, your liability for state income taxes will increase as income increases, so this is another important variable in planning for changes in your income.

Note that changes in income as discussed in this report are referring to changes in taxable income . Since taxable income is all of your gross income less allowable deductions, this same concept also applies to changes in deductions that are allowable for both Regular Tax and AMT purposes. For example, if your itemized deduction for charitable contributions were decreased by $10,000, effectively this is the same as if your income were to increase by $10,000.

In summary, in this example if the only variable you could change is your income, then it makes sense to try to move income into a year you are in the AMT. You will be paying tax on it only at a 28% AMT rate, up to the point where you are no longer in the AMT, at which point you will be paying tax at the 35% Regular Tax rate.

Note also that you now have the reason wealthy people rarely pay the AMT - most of their income is in the 35% bracket, and even with all of the Regular Tax-AMT differences it is unlikely the AMT with its 28% bracket will result in a higher overall tax.


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.