Author Topic: AMT this year, not next year - how to minimize tax burden  (Read 3177 times)

historienne

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AMT this year, not next year - how to minimize tax burden
« on: May 27, 2015, 12:19:37 PM »
Due to the timing of my husband's signing and retention bonuses, we will almost certainly have to pay the AMT.  Next year, our income will probably drop back under the threshold, and it most likely remain there going forward.  I'm trying to structure our finances to minimize the overall taxes paid over this two-year period.  I have some thoughts, but would welcome corrections and other suggestions. 

Current ideas include:
1 - Adjust state taxes withholding to slightly under-withhold this year, so that we don't get a state tax refund.  State taxes are deductible in the year paid, I believe, so we want to pay more of our state taxes next year (when they will be deductible) than this year (when they won't be).  I believe that we can slightly underwithhold without triggering a penalty.
2 - Make all our charitable contributions for the two-year period in 2016, since they are deductible at the marginal rate, which is higher than the AMT rate.
3 - We are thinking of getting a solar system.  In our state, that gets us a significant state tax credit.  My thinking is that we should get the system this year (and adjust state withholding to underwithhold even after that credit).  Again, the goal would be to minimize state taxes paid in the AMT year.

Any other thoughts?  Our mortgage requires property tax to be paid through escrow, so we can't adjust that at all. We don't usually qualify for other substantial deductions (under the threshold for medical and home office, and we do an FSA for dependent care).

MDM

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Re: AMT this year, not next year - how to minimize tax burden
« Reply #1 on: May 27, 2015, 12:48:55 PM »
I believe that we can slightly underwithhold without triggering a penalty.
Yes.  There are often multiple "safe harbors" that cover the no-penalty space.  E.g., things similar to
 - less than 10% due in April
 - less than $500 due in April
 - withholding at least as much (or 110% as much) as due last year
 - never having paid taxes to that state at all.
Fit any of the above (as applicable to your state) and you have no penalty.  Your homework is to find out what is applicable in your state.

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2 - Make all our charitable contributions for the two-year period in 2016, since they are deductible at the marginal rate, which is higher than the AMT rate.
Looks good.

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Our mortgage requires property tax to be paid through escrow, so we can't adjust that at all.
Maybe you can't, but maybe you can.  Talk to the mortgage holder to see if the tax payment can be scheduled.  From http://www.irs.gov/taxtopics/tc503.html:
"If a portion of your monthly mortgage payment goes into an escrow account, and periodically the lender pays your real estate taxes out of the account to the local government, do not deduct the amount paid into the escrow account. Only deduct the amount actually paid out of the escrow account during the year to the taxing authority."
« Last Edit: May 27, 2015, 02:06:49 PM by MDM »

seattlecyclone

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Re: AMT this year, not next year - how to minimize tax burden
« Reply #2 on: May 27, 2015, 02:05:34 PM »
1 - Adjust state taxes withholding to slightly under-withhold this year, so that we don't get a state tax refund.  State taxes are deductible in the year paid, I believe, so we want to pay more of our state taxes next year (when they will be deductible) than this year (when they won't be).  I believe that we can slightly underwithhold without triggering a penalty.

Sounds good. State taxes aren't deductible at all on the AMT, so it's entirely possible that paying your state taxes late and eating some late payment penalties would be a better choice than paying on time this year. You'll have to do the math for your situation.

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2 - Make all our charitable contributions for the two-year period in 2016, since they are deductible at the marginal rate, which is higher than the AMT rate.

Are you sure that you'll be paying less by delaying the charitable contributions? The base AMT marginal rates are 26/28%, but if your AMT income is in the exemption phaseout range (between $158.9k and $492.5k for married filing jointly), your real AMT marginal rate will be 32.5/35% when you take the phase-out into account. If that's higher than your marginal rate under the regular tax system you may want to do all of your giving in 2015 instead of 2016.

historienne

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Re: AMT for one year only - how to minimize tax burden
« Reply #3 on: May 28, 2015, 09:13:37 AM »
Are you sure that you'll be paying less by delaying the charitable contributions? The base AMT marginal rates are 26/28%, but if your AMT income is in the exemption phaseout range (between $158.9k and $492.5k for married filing jointly), your real AMT marginal rate will be 32.5/35% when you take the phase-out into account. If that's higher than your marginal rate under the regular tax system you may want to do all of your giving in 2015 instead of 2016.

Oh, good point.  I was not calculating that correctly.  We will still be in the exemption phaseout range. 

dragoncar

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Re: AMT this year, not next year - how to minimize tax burden
« Reply #4 on: September 23, 2016, 09:47:52 PM »
Necrothreading instead of making a new topic.  This year my property taxes won't be deductible due to AMT.  Next year they will.  So it makes sense to pay a 10% late fee to pay them next year, right?  Just want to sanity check.

seattlecyclone

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Re: AMT this year, not next year - how to minimize tax burden
« Reply #5 on: September 23, 2016, 11:57:05 PM »
Maybe. Are you in a position to take a credit next year for the AMT you paid this year? If not, probably makes sense to delay it until next year even with a 10% penalty. Otherwise you might want to run some numbers. It's possible that paying the property tax this year, even though it won't change the amount you owe the feds this year, might change the amount of credit that you would get to claim next year, enough to be a better deal than waiting until next year and paying an extra 10%.

dragoncar

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Re: AMT this year, not next year - how to minimize tax burden
« Reply #6 on: September 24, 2016, 12:03:24 AM »
Maybe. Are you in a position to take a credit next year for the AMT you paid this year? If not, probably makes sense to delay it until next year even with a 10% penalty. Otherwise you might want to run some numbers. It's possible that paying the property tax this year, even though it won't change the amount you owe the feds this year, might change the amount of credit that you would get to claim next year, enough to be a better deal than waiting until next year and paying an extra 10%.

Thanks, I wasn't even aware of the credit.  Doesn't apply to me though.  Without simulating both years returns, is it safe to say that I should be willing to pay a penalty up to my marginal tax rate for 2017?  Because it's no deductible this year and deductible next year?  Or is the threshold 28%?  Now I kinda wish I under withheld my state taxes although not sure if that works the same way

seattlecyclone

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Re: AMT this year, not next year - how to minimize tax burden
« Reply #7 on: September 24, 2016, 12:12:33 AM »
Sounds reasonable. If you expect your savings to earn a positive return you could even pay a penalty of (tax bracket + investment return) and still break even.

dragoncar

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Re: AMT this year, not next year - how to minimize tax burden
« Reply #8 on: September 24, 2016, 12:43:46 AM »
At some point they'll put a tax lien on my house right?  Might piss off the mortgage company

dragoncar

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Re: AMT this year, not next year - how to minimize tax burden
« Reply #9 on: December 05, 2016, 05:45:09 PM »
Decided to pay the taxes this year because... well Trump/Republicans want to get rid of the property tax deduction in 2017 anyways, or limit it, or maybe not, who knows.  There's a risk either way so I'll just go with the "correct" way since I don't have a crystal ball.