Does a Distribution From a Roth IRA Affect the AMT?
The Roth IRA is a retirement account allows you to make the most of your money by allowing it to grow completely tax-free. In addition, A Roth will also reduce your taxes in retirement, because Roth withdrawals when you retire are also tax free. Your tax situation becomes more complicated if you are subject to the Alternative Minimum Tax, as the Congressional Joint Committee on Taxation estimates one-fifth of all taxpayers are. Even in this case, a Roth is helpful for managing your tax bill.
What is AMT?
The AMT is a separate tax system intended to make certain that everyone pays a certain amount of income tax, regardless of the number of tax deductions they claim. This system sets two different tax rates, 26 and 28 percent. While these rates are lower than the highest marginal income tax rate of 35 percent, many of the deductions normally allowed under the tax code are eliminated with the AMT. Taxpayers must pay taxes under the system that results in the highest tax bill.
Many Roth IRA distributions are not added to your taxable income, as they are tax-free. If a Roth distribution is non-taxable, it will not affect your AMT. Examples of tax-free Roth distributions are normal distributions when you are older than age 59 1/2, or withdrawals of Roth IRA contributions at any age. Also, Roth IRA distributions to purchase a first time home from a Roth IRA account open at least five years are tax-free.
A non-qualified Roth IRA distribution is added to your taxable income for the year, and if you are subject to the AMT, will increase the amount of taxes you pay. Withdrawal of Roth IRA earnings before you reach age 59 1/2 are non-qualified distributions. In addition to the AMT, you could be responsible for paying a 10-percent penalty on non-qualified Roth distributions, independent of the AMT.
Avoiding the AMT
Take advantage of any employee benefits that reduce your taxable income. Examples of these are 401(k) contributions, as well as medical flex benefit plans or healthcare reimbursement accounts if you are eligible. If you operate a business out of your home, see if you qualify for business use of the home deductions for a portion of your real estate taxes, as these deductions are not eliminated by the AMT. If you claim employee business expenses, and your employer reimburses you a flat fee included in your income, see if your employer will switch to an accountable plan where you turn in your receipts, and your employer reimburses you without including the amount in your taxable income.
Craig Woodman began writing professionally in 2007. Woodman's articles have been published in "Professional Distributor" magazine and in various online publications. He has written extensively on automotive issues, business, personal finance and recreational vehicles. Woodman is pursuing a Bachelor of Science in finance through online education.