Is the alternative minimum tax in your future?

January 1, 2006

The AMT is a totally separate tax system with its own unique set of rules.

Q. My accountant has informed me that I likely will be subject to the alternative minimum tax (AMT) this year. I always thought the AMT was only for the "super rich" who found ways to avoid paying any taxes? Has this changed?

The AMT is a totally separate tax system with its own unique set of rules. Certain deductions, exclusions, and credits that are in place to reduce regular income tax liabilities, known as AMT adjustments or preference items, are not permitted for the AMT. Because of this, it has now become very easy to fall into the AMT. In addition, there are only two AMT rates: 26% on AMT income up to $175,000 and 28% on AMT income above $175,000. The key is knowing if and when you will be subject to the AMT.

Many taxpayers' AMT exemptions will be reduced due to a phase-out based on earned income. This phase-out for joint filers begins at $150,000 of AMT income and the exemption is completely eliminated at the $382,000 level. For single taxpayers, the exemption is phased out starting at $112,500, then eliminated at $273,500.

Unfortunately, it is very difficult to gauge the impact of the AMT proactively prior to doing the annual comparison. However, if you feel you will be subject to the AMT, you should consider, if possible, postponing to next year the payment of deductible expenses not allowed for AMT purposes, including state and local income taxes, as well as real estate and property taxes.

If, on the other hand, you are confident you will be subject to the AMT this year, but not next year, try to accelerate and take income this year to the extent necessary to zero out the AMT. The effective income tax rate on this income then becomes a maximum of 28%, the top AMT rate, versus the current maximum regular income tax rate of 35%. Alternatively, if you are not subject to the AMT this year, but may be subject to it next year, consider paying and deducting those items this year that wouldn't be deductible under the AMT.

While most physicians rely on their accountants to do the calculations, it certainly makes sense to be at least aware of the AMT and its impact on your overall tax plan. Prior to making any changes that may impact your AMT situation, be sure to consult with your tax professional.

Q. Since I have very uncertain feelings about the direction of the stock market, it has been recommended to me that I purchase an equity-indexed annuity. Is it true that this product will allow me to invest money in the stock market while still enjoying the peace of mind of a minimum guaranteed rate of return?

A. Sales of equity-indexed annuities (EIAs) have been soaring due to financial salespeople touting them as a perfect investment for those saving for their retirement years. While the concept of an EIA may seem relatively simple, there are many nuances to them that can impact future returns.