Tax Breaks for Charitable Giving: Maximize Your Impact and Your Savings
Category: Business
Congress initially enacted The Alternative Minimum Tax (AMT) to ensure that high-income taxpayers pay a minimum amount of tax. It passed in 1969 in response to a report that high earners (the equivalent of $1.17 million a year in 2020) were not paying any tax at all.
The AMT tax calculation is a parallel system to the regular tax system. It has its own definition of income and expenses, rules for income recognition and timing, exemptions, and tax rates.
Every taxpayer is subject to AMT rules, and the AMT results in more tax due if the AMT calculation is higher than the regular tax calculation.
The AMT initially targeted the very highest earners, a fraction of the top 1% of earners. The impact changes, however, with inflation and shifting rules. At one point, up to 20% of taxpayers were subject to AMT. Changes in 2017 reduced its impact by increasing income thresholds and adding a cost-of-living adjustment. But, its effects on you will change as your income changes and tax laws shift.
When you calculate your taxes, you actually calculate them twice, once with and once without AMT rules. The AMT is different because it does not allow the Standard Deduction, personal exemptions, or many popular itemized deductions.
Instead of the standard deduction, there is an AMT exemption which in 2021 will be $114,600 for a married couple filing jointly, $57,300 for those married filing separately and $73,600 for singles or head of household.
The exemption begins to phase out for individuals with incomes over $523,600 and married couples with incomes over $1,047,200:
After the adjustments, the AMT tax is 26% of income under a threshold and 28% of income over the threshold. That threshold in 2021 will be $199,900 for married couples and $99,950 for singles.
The AMT is more likely to affect married couples with children. They often have a higher income, especially if both parents work and the AMT does not allow additional exemptions for additional household members (like children for example). Also, this is one area in the tax code where there is still a marriage penalty.
Several adjustments often lead to having to pay AMT. They are often called “triggers,” but they aren’t actually triggering anything: they just adjust your income such that the AMT tax amount is more than the non-AMT amount, so you end up paying the higher AMT tax.
Often, the items that trigger AMT include deductions for state and local taxes and the exercise of incentive stock options. Other AMT adjustments and preferences include:
If you are subject to AMT this year, you can’t change your situation for this year, but there are a few things you can do to reduce your exposure in future years.
These strategies come with caveats and challenges, so I recommend that you consult an expert to help you navigate this tricky issue. We can take a look at your taxes, let you know what your risks are, and help you craft strategies so that you pay the right amount.
If you are a client and would like to book a consultation, call us at +1 (212) 382-3939 or contact us here to set up a time.
If you aren’t a client, why not? We can take care of your accounting, bookkeeping, tax, and CFO needs so that you don’t have to worry about any of them. Interested? Contact us here to set up a no-obligation consultation.
Interested in receiving updates in your mailbox? Check out our newsletter, full of information you can use. It comes out once every two weeks and you can register for it below.
Category: Business
Category: Business