Topics
Tax-exempt Interest on Nonessential Bonds
For AMT purposes, you must include as a tax preference item the tax-exempt interest on qualified private activity bonds issued after August 7, 1986, unless such bonds are specifically exempt from this rule. Interest paid on buying or carrying such bonds is deductible for AMT purposes.
Back to top
Exclusion on Qualifying Small Business Stock
If you sold small business stock qualifying for the 50% or 60% exclusion, 7% of the excluded gain is treated as an AMT preference item.
Back to top
Accelerated Depreciation of Property Acquired Before 1987
| ||||||||||||
For personal property leased to others before 1987, the preference item is the excess of the regular tax deduction over the depreciation that would have been allowed under the straight-line method, without regard to salvage value. The excess is computed separately for each asset. For 10-year property, a 15-year recovery period is used.
Back to top
Oil and Gas Preference Items
Independent oil and gas producers and royalty owners do not have to compute preference items for excess percentage depletion deductions. Excess intangible drilling costs (IDC) are generally not treated as a preference item unless they exceed 40% of AMT income; see the instructions to Form 6251.
Back to top
Tax Credits Allowed Against AMT
The only tax credit allowed in computing tentative alternative minimum tax liability on Form 6251 is a revised version of the foreign tax credit allowed for regular tax purposes. The allowable credit is generally based on foreign source AMT income. The AMT foreign tax credit reduces the tentative AMT figured on Form 6251 before comparing it to the regular tax liability (actual AMT is the excess, if any, of tentative AMT over the regular tax). If the AMT foreign tax credit exceeds the limits detailed in the Form 6251 instructions, the unused amount generally may be carried back or forward; follow the Form 6251 instructions.
If there is an AMT liability on Form 6251, that AMT is added to regular tax liability on Form 1040. Various tax credits may be claimed against the AMT as well as the regular tax. For 2008, all nonrefundable personal credits can be used to set AMT as well as regular tax.
There is a revised refundable tax credit on Form 8801 for those who exercised incentive stock options in the past, generating AMT at that time (because the spread between the exercise price and the stock's price at the time of exercise was an adjustment for AMT).
Back to top
Avoiding AMT
If you are within the range of the AMT tax, periodically review your income and expenses to determine whether to postpone or accelerate income, defer the payment of expenses, and/or make certain tax elections.
There are elections, such as the election of alternative straight-line MACRS depreciation, that may avoid AMT adjustments. However, such elections will increase your regular tax. Similarly, adjustment treatment for mining exploration and development costs, circulation expenses, and research expenses can be avoided by elections to amortize.
The following steps may also avoid or soften the impact of the AMT tax:
- If your income is increasing, defer deductible expense items to the next year if your regular tax bracket in the next year is likely to exceed your AMT tax rate (either 26% or 28%, depending on your AMT income). Consider deferring payment of home mortgage interest and large medical bills. Do not prepay state income tax. You will get a larger tax benefit from the deductions in the later year.
- Spread out the exercise of incentive stock options (ISOs) over more than one year to limit the AMT adjustment for the bargain element (the difference between the option price and the fair market value of the stock on the date of exercise). If you exercise an ISO and hold the acquired stock beyond the end of the year, the bargain element is subject to AMT. You may find yourself with an unexpected tax liability, and if the stock has depreciated in value since the date of exercise, you may find yourself short of funds to pay the liability even after selling the stock. To limit the AMT adjustment, you can stagger the exercise of options over more than one year. You can avoid the adjustment completely by selling the stock in the same year that the option was exercised, but if you do, any gain on the sale will be taxed as ordinary income and not at the favorable rate for long-term capital gains.
Back to top
Accelerating Income
If you find that you will be subject to AMT in a current year, you may want to subject additional income in that year to the 26% or 28% AMT tax rate. In such a case, consider accelerating the receipt of income to that year. If you are in business, you might ask for earlier payments from customers or clients. If you control a small corporation, you might prepay salary or pay larger bonuses. But when doing so, be careful not to run afoul of the reasonable compensation rules. You might also consider paying dividends.
Back to top
Summary
- Your AMT will be increased by certain preference items such as tax-exempt interest on some qualified private activity bonds.
- 7% of the excluded gain of small business stock qualifying for the 50% or 60% exclusion is an AMT preference item.
- To lessen AMT, consider increasing your income for the year by prepaying salary of your own business, or getting payments from clients.
for more about AMT, please go to:
http://finance.yahoo.com/how-to-guide/taxes/136779
