questions to ask your financial advisor about AMT | Financial advisors

Alternative Minimum Tax, or AMT, is what the name suggests: a minimum tax floor you may be subject to as an alternative to taxes owed through regular tax calculations. You must pay the greater of your ordinary tax payable or that calculated under the AMT.

“The AMT was intended to create a tax floor, so that regardless of the number of tax deductions or credits, taxpayers could still be subject to tax,” says Mark Conrad, Chartered Accountant, certified financial planner and partner of Compardo, Office of Wienstroer, Conrad & Janes within the Moneta group. If you are able to reduce your effective tax rate, or the amount of tax you pay relative to your gross income, below a certain level, you may find yourself subject to AMT.

The law on tax cuts and employment modified the rules of the AMT by increasing the amount of income exempt from the AMT and the threshold from which this exemption begins to be eliminated. Prior to the TCJA, the AMT exemption was $54,300 for single filers with a phase-out starting at $120,700. After the TCJA was enacted, the exemption increased to $73,600 for the 2021 tax year, with the phase-out beginning only at $523,600 for single filers and heads of households. Married taxpayers filing jointly are exempt up to $114,600, with elimination beginning at $1,047,200 in 2021. These rates are indexed to a measure of inflation and increase each year.

“These changes, combined with the $10,000 TCJA cap on state and local tax deductions, mean that many taxpayers who were once subject to AMT are no longer affected by it,” says Justin Gilmartin, CEO of tax services at The Colony Group.

But there’s a big caveat to that: the AMT provisions in the TCJA sunset in 2025, which means that unless Congress takes action, these changes expire at the end of 2025. “So while AMT has been on the back burner for a few years, it’s poised to regain relevance in 2026,” says Gilmartin.

Even before that, it’s important to keep the AMT an ongoing topic of conversation with your financial advisor because the best way to minimize taxes, including the AMT, is to be prepared for it.

Why You Should Discuss AMT With Your Advisor

While a tax professional is usually the best person to discuss your tax situation with, discussing your taxes with your financial advisor is also important.

“Tax planning should be part of every financial advisor’s approach to growing a client’s investable assets and retirement income,” says Rob Burnette, CEO, financial advisor and professional tax preparer at Outlook Financial Center. It goes back to the old adage, “It’s not what you make, it’s what you keep,” which he says is still relevant.

It’s also important to discuss AMT with your advisor, as AMT planning strategies can differ from typical tax minimization strategies and vary depending on the situation, says Julie Alcala, Senior Strategist in Wealth Management at BNY Mellon Wealth Management. “For example, one person might avoid AMT by deferring their earnings and another might avoid it by accelerating their earnings.”

Questions to Ask Your Financial Advisor About AMT

Here are some of the most important questions to ask your advisor about AMT:

  • How to plan the AMT?
  • What items of income and deduction can trigger AMT?
  • Can you give me a tax projection?
  • Are there ways to offset my capital gains?
  • Should I detail my deductions?
  • How would exercising incentive stock options (ISO) affect my exposure to AMT?
  • Will I ever be able to get back what I paid in AMT?

How to plan the AMT?

“If it looks like you might be subject to AMT in the next tax year, it’s important to prepare accordingly,” says Erik Gary, partner at Mazars. “Learning to avoid AMT could save a significant amount of money, depending on your liability.”

AMT can be triggered by the timing of income and deductions in a given year, Alcala says. “If your tax advisor suggests that you may be subject to AMT, you should coordinate with your financial advisor to determine whether income that may be controllable, such as capital gains or Roth conversions, should be accelerated or deferred. .”

AMT has two tax rates: a 26% rate for the first $199,900 above the exemption level, or $73,600 for 2021, and a 28% rate on income beyond this level. Advisors can help clients stay below these income thresholds in the years they trigger AMT.

What items of income and deduction can trigger AMT?

“It’s important to ask your advisor about the income and deduction items under the new rules that may trigger AMT,” says Conrad.

He says the most common things that can trigger AMT for the 2022 tax year are:

  • Have a large number of itemized deductions and taxable income above the exemption phase-out thresholds, which are $539,900 for single filers and $118,100 for married couples filing jointly in 2022.
  • Earn significant interest income, usually tax-exempt interest, from certain municipal bonds from private activities. (Large dividend income could also trigger AMT, says Conrad.)
  • Realize a large capital gain on a property or investment, which can push your income above the AMT phase-out thresholds.
  • Exercise of incentive stock options (ISO). “Generally, the difference between the exercise price and the fair market value on the date of exercise should be added to the AMT for an ISO if the taxpayer retains the shares after December 31 of the year of exercise. exercise,” he says.

Can you run a tax projection for me?

Based on what may trigger AMT, you should have your advisor review a multi-year tax projection, Conrad says.

As complicated as AMT is, an advisor should be able to use a projection to help you determine the impact of AMT when planning for a trigger event, Gilmartin says.

You can then use these projections to determine whether it would be wise to accelerate or defer income items to shelter yourself from AMT, Conrad says.

Are there ways to offset my capital gains?

Deferring income tax items is not the only way to mitigate AMT exposure. You can also ask your advisor about other ways to offset capital gains to reduce your taxable income, Burnette says.

Some strategies you might employ include harvesting tax losses or using tax-advantaged investments like municipal bonds, the income from which is exempt from federal tax.

Should I detail my deductions?

If you’re subject to AMT, you may have a lower tax burden by itemizing deductions, such as charitable contributions, even if your itemized deductions are lower than the standard deduction in regular tax calculations, Burnette says.

This is because you are not allowed to use the standard deduction when calculating AMT income. But you can itemize your deductions, which could help you stay in the lower AMT tax bracket.

“I had a client this year who saved over $4,000 in tax liability by forcing the breakdown of deductions even though those deduction amounts were much lower than the standard deduction amount,” he says.

How would exercising incentive stock options (ISO) affect my AMT exposure?

“Normally, simply exercising ISOs to buy shares at a discount would not be a taxable event,” Gilmartin says. But calculating the AMT requires you to add to your income the difference between the strike price and the fair market value of the stock on the date you exercise your option.

“That means taxpayers might have to pay tax on their ‘paper’ gain, even if they didn’t actually sell any shares,” he says.

“However, being in AMT from the ISO exercise can result in an AMT credit,” adds Gary. “This credit could potentially be used in future years to reduce your tax bill.”

Will I ever be able to recover what I paid in AMT?

“AMT liability can be caused by two types of adjustments and preferences,” says Gilmartin. These are deferral items, such as the exercise of ISOs, which can generate a credit to offset future years’ taxes, and exclusion items, such as the standard deduction, which are not deductible for AMT.

“Deferral items are temporary while exclusion items result in a permanent difference in taxable income,” he says. “If the AMT is due due to a deferral item, taxpayers can carry forward a credit to future years.”

Then, if you are not subject to AMT in future years, you can claim a credit for the difference up to the amount you deferred. This is another reason to have ongoing AMT conversations with your financial advisor: you want to keep track of any AMT credit you may have accrued.

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