March 29, 2024
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AMT Tax Part II: How You Can Benefit From the AMT Tax

Last article I explained how horrible the AMT tax is. However, for this article I’ll explain how, in specific circumstances, you may actually be able to save money because of it. Before I get into the details, I was asked by a couple of people if I could further explain how the AMT tax works. This time I’ll use real-life experiences to try and make sense of this tax calculation.

When I was growing up, our school used to hand out boxes of candy bars to the students to sell and raise money. But not just any student could sell the candy bars. You couldn’t get your hands on one of those boxes until you were at least in third grade.

I had older siblings who would come home with these massive boxes filled with chocolate and I couldn’t wait until I was old enough to take one of those boxes home. I finally entered third grade and when it was candy bar time I couldn’t have been more excited. Not only was I finally able to sell candy bars, but I found out that there’s also a competition to sell the most candy bars, with the winner taking home a five-pound Hershey Bar. Life was good for this third grader. I came up with this whole strategy of who I was going to sell to and how many boxes I would sell so I can get my hands on those five pounds of sweet, sweet, milk chocolate heaven.

Long story short, I knocked on my next door neighbor’s home the second I got home and asked if they would like to buy a candy bar. The neighbor said no (apparently other people have access to Hershey’s bars as well), yada yada yada, I gave up on selling and ended up eating half the box over the next two weeks. So this pretty much became my ritual each year—I come home with a box of candy, eat half of it, and return the other half. I have to say, though, knowing that I probably ate five pounds of candy from the box I was supposed to sell definitely took the sting out of losing out on the five-pound grand prize.

The point is, there were two kids in my class, let’s call them Jane and Jill, that somehow were able to sell hundreds of candy bars. For the rest of my elementary school career, Jane and Jill were always competing with each other with the most sold. Some years Jane won and some years Jill won. But one of them always won, and they always both sold over 500 candy bars.

As an aside, I always suspected foul play. There were only three options as to how they were able to sell that much candy—(a) they were the greatest nine-year-old salesmen in the history of mankind, (b) they found some remote village that had never tasted a Hershey’s bar before, or (c) their parents bought hundreds of candy from them so they could win.

So what does this have to do with the AMT tax? Jane is your regular income tax calculation. She’s working hard to sell the most amount of candy bars. She’s using her own set of calculations and strategy to reach that number. Jill is the AMT tax. She uses a whole different set of calculations and strategy to get to that high number. But just like in the dog-eat-dog world of elementary school candy selling, there can only be one winner. Whoever has the highest amount wins.

This is exactly how the AMT tax works. If the regular income tax has a higher amount of tax calculated then the AMT won’t be applicable to you. But if the AMT tax has the higher tax calculated then that will be the winner. So as you can now clearly see, the comparison between the tax system and Jane/Jill is actually quite uncanny…besides for the fact that Jane and Jill were huge cheaters and I hope they were engulfed in guilt as they snacked on that massive candy bar of shame. Other than that, the same.

So now that we know what the AMT tax is, how can we take advantage of it? It may sound like a radical approach because all we hear about is how everyone wants to avoid the AMT tax. The problem is sometimes you just can’t. You may make too much money one year and not enough items that are exempt from the AMT tax. In that case, instead of trying to avoid it, embrace it and make it work in your favor.

For example, let’s say you’re a real estate broker and you’re having a killer year. You know when tax time comes you’re gonna get hit with the AMT tax. However, maybe you don’t necessarily expect to have such a great year next year, so the AMT won’t be applicable next year. Remember what I said in the previous article—the maximum tax rate for the AMT is 28 percent, whereas the regular tax rate can be as high as 39.6 percent. If the AMT tax is going to be the winner this year that means any additional income will only be taxed at a maximum rate of 28 percent. So if you have a bonus or a commission that is supposed to be paid in the beginning of January next year, if you’re able to accelerate that payment to the end of this year instead then it will only be taxed at 28 percent instead of 35 percent or 39.6 percent next year when the AMT tax won’t be applicable to you.

So in short, if you anticipate getting hit with the AMT tax this year and not next year, and you have the ability to accelerate pending income, then paying taxes now at the AMT rate will actually save you money.

The bottom line is this—there can only be one winner; either the AMT tax or regular tax. Unfortunately, their gain is your loss as you have to foot the bill for whoever wins. But with a bit of tax planning, you may be able to mitigate some of the damage.

Daniel Magence, CPA, Esq. is a principal at Pristine CPA Solutions, LLC (www.pristinecpa.com). Pristine CPA Solutions offers tax and accounting services to individuals and businesses of all sizes, whether it’s tax returns, bookkeeping, payroll services or personal income budgeting. He can be reached at [email protected] or 201-326-6908 if you have any questions or comments, or are interested in using Pristine CPA’s services. Feel free to contact us for a free consultation.

By Daniel Magence, CPA, Esq.

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