“This may apply to business owners who can control the amount of income they pull from their business,” Preus said. “It may also apply to taxpayers that participate in employer-sponsored deferred-compensation plans. They may choose not to participate in those plans in 2024 and 2025—[so they can] realize more income in those years—and then resume participating in 2026, lowering their income in that year to avoid getting hit by the AMT when it comes back.”
Lazzara also suggested that clients invest in tax-efficient securities, delay capital gains and make charitable donations.
“Contributing to a donor-advised fund may be a good option,” she said. “Managing the timing of exercising incentive stock options may be beneficial. And if you find yourself underpaid on estimated tax payments, be aware that the current federal interest rate [for penalties] is 8%.”
“Wealthy taxpayers should take a careful look at their long-term capital gains realization,” Preus added. The boost in income from these gains “can cause the taxpayer to unexpectedly hit the AMT exemption phaseout threshold, which would then subject more of their regular income to the AMT.” They might trigger long-term gains, for instance, if they are making portfolio changes, which means they may want to accelerate the realization of the gains.
Preus said advisors should “pay close attention to the policy debates taking place in Washington” as the income tax provisions of the Tax Cuts and Jobs Act expire.
“It is possible that there will be some compromises,” he said. “The AMT … was a very unpopular tax.”