Wealthy clients have probably heard about—and worried about—the alternative minimum tax (AMT), a piece of the tax code designed some four decades years ago to insure that wealthy taxpayers didn’t trim tax bills with too many deductions.
That sting has eased. Tax reform increased AMT exemptions to $70,300 for those with single tax filing status, $109,400 for those filing jointly and $54,700 for those using the married "filing separately" status. Phase-outs were also increased to start at $1 million for married couples and $500,000 for all other taxpayers (other than estates and trusts).
“Most of our clients will be out of the AMT,” said Ann Etter, a CPA/CFP with Goodney & Associates in Northfield, Minn. “Those few still subject to the AMT ask the usual questions about how to mitigate the effects."
The easiest ways to do that, according to Etter, involve maximizing retirement contributions, funding a health savings account and making investment account adjustments where it makes sense to take the losses for use against gains. “After that, we go for increasing charitable contributions,” she added.
The hard part is recognizing if your client needs to pay the AMT at all now. “The only way to know is calculate it using IRS Form 6251,” said John Piershale, a CFP at Piershale Financial Group in Barrington, Ill. “If you have moderate to high income, you should run the numbers—the IRS fully expects you to know if you’re subject to AMT.”
Those still subject to the AMT also indirectly benefit from the new capping of the the state and local/property tax deduction at $10,000, especially in high-tax states and localities: They didn't get the tax break anyway, but at least now it's less of a loss in deduction amounts.
Said Geoff Christian, Greenville, S.C.-based managing director at CBIZ MHM and leader of the national state and local tax practice, “You don’t get the SALT deduction if you are in AMT and, depending on your income levels, you might be in that range.”
“Although the SALT deduction is limited to $10,000, many of our clients weren’t getting the benefit of the state tax deduction as they were subject to the AMT,” said Gail Rosen, a CPA at Wilkin & Guttenplan in Martinsville, N.J.
“I often use $250,000 to $750,000 as the income range that clients are likely to have incurred an AMT liability as a resident of New Jersey, New York or Connecticut, where they pay both high state income taxes and high real estate taxes,” said Neil Becourtney, a CPA and tax partner in the Eatontown, N.J., office of CohnReznick.
In the New York area, for instance, “assume a joint filer [will incur AMT] with $600,000 of wages and no other income, $50,000 of state income taxes, $25,000 of real estate taxes, $14,000 of mortgage interest and $11,000 of charitable contributions, resulting in taxable income of $500,000,” Becourtney said. Under the new tax law, and using the same numbers, the taxable income of a client who files under the married filing jointly status grows to $565,000.
Other factors impacting if your client incurs AMT include the number of dependent children and whether your wealthy client had sizable long-term capital gains or qualified dividend income. The AMT also remains unfriendly for incentive stock options, according to Piershale. “When you exercise ISOs ... it’s important to plan ahead [for] the timing of a sale,” he said.
“For anyone heavily invested in private activity bonds, a visit to the CPA is also recommended. There’s an AMT adjustment for private activity bond interest,” Etter said. As with any change, the biggest problem is expectations exceeding reality. “If you know by December what the impact is, you can take steps to mitigate the tax burden,” she said. “If you don’t know until January or until filing time, there are fewer options available.”