How to Reduce Alternative Minimum Tax

Enacted in 1969, the alternative minimum tax started out as a tool to prevent a small number of high-income earners from paying absolutely no taxes. The AMT eliminates personal exemptions and just about every itemized deduction and replaces them with a single AMT deduction and a special tax rate. The ranks of those who fall under the requirements of the alternative minimum tax have grown to encompass millions of taxpayers, many of whom are hard-working professionals who own their houses and pay high state income taxes. Some measures to reduce the tax may seem extreme, but each taxpayer's individual situation will dictate whether the action is worth it.

Move

Many AMT payers live in states with high property taxes, high state income taxes or both. This happens because the AMT hits people who claim so many deductions that their tax under the AMT is higher than it would be under the regular income tax system. As such, residents of high-tax states like California, New York or New Jersey tend to pay AMT at a much higher rate than residents of low-tax states since those taxes are deductible. One way to eliminate this problem is to move to a state with lower taxes. This will cause your itemized deductions to go down and reduce the risk that you will be subject to the AMT.

Get Divorced

Some married couples that are subject to the AMT can lower their tax burden by remaining together but getting legally divorced. This can work especially well if one spouse has higher earnings than the other one. In this instance, the high-earning spouse would pay alimony to the other spouse to even things out and keep both of their incomes below the AMT threshold. Since the AMT has a significant marriage penalty, it is much easier for two single people to avoid it than one married couple.

Be Cheap at Work

For many people who have to travel for work or who make work-related expenses out of their own pockets, the AMT's elimination of the deduction for unreimbursed employee expenses can hit you doubly hard. The solution is to stop spending your own money for your employer. Sit down and have a conversation with her and explain that you would be willing to accept a salary decrease in return for an increased expense account. Your employer will save money since it won't have to pay payroll taxes on your expense account and you'll be more likely to avoid the AMT.

Avoid W-2 Income

Another solution is to shift income away from what you earn as an employee and turn it into income you earn as an independent contractor. While Schedule C income is still subject to AMT, you get the ability to write off expenses much more liberally. Furthermore, since you are paying taxes only on your profits, the expenses that you claim on your Schedule C aren't subject to the AMT's limitations.

Shift Expenditures Between Tax Years

Timing your payments for things like property taxes and state taxes can also help to minimize your AMT liability. For example, if you know that you will not be subject to AMT this year but will be next year, prepay your property taxes. This will double your deduction this year so you don't have to pay any next year and don't lose the deduction to the AMT.