February 2005  Email this  Print this
 License or reprint this article
AMT
It Could Happen to you
(Page 3 of 4)
by Mary Beth Franklin
A matter of timing
Taxpayers who are susceptible to the AMT just because of the sheer size of their families or their state and local tax bills have few options to avoid the parallel tax. But for others, timing does matter. For example, if you expect to cross the threshold into the AMT in 2006, but still play by the regular rules in 2005, you may want to accelerate deductible expenses, such as property taxes and state income taxes, into this year. In an AMT year, the write-offs have no value.
Although long-term capital gains on the sale of stock or other assets are taxed at the same 15% rate under both the regular rules and the AMT rules, a big gain can push you into the AMT. How? Because as income rises above $150,000 on joint returns and $112,500 on single returns, the AMT exemption amount is gradually phased out. As a big profit squeezes the exemption, the AMT becomes more threatening.
Once you know you'll get hit with the AMT, it can pay off to push as much income as possible into the AMT year because it will be taxed at the top AMT rate of 28%, compared with the top rate of 35% under regular tax rules. If you have the option of taking a lump-sum payment or spreading a gain over several years, financial planner Kitces says it is usually better to take the gain all at once. Sure, that can mean a major tax hit. But by spreading the gain over several years, you risk losing your AMT exemption year after year and paying more tax than you would if you simply bit the bullet.
Phantom wealth
No one understands the importance of timing better than people who exercised stock options in early 2000 and then watched their paper profits disappear as the tech bubble burst. Under the regular tax rules, the difference between the discounted price you pay to exercise incentive stock options and the stock's value on the day of the transaction is ignored until the stock is sold. In AMT land, however, the instant paper profit is considered taxable income right away.
Nina Doherty of Chantilly, Va., knows the pain this can cause. In March 2000, she exercised options for 20,000 shares of stock of her employer, Net2000 Communications, the day before it went public. As the first employee of the small telecommunications company, it looked like her years of hard work had really paid off: The paper profit was nearly $800,000. But by the end of 2001, the company was out of business, the stock was worthless, and Doherty, 42, was still on the hook for an AMT bill of about $100,000. She still owes more than $50,000 -- and that's after the IRS confiscated $30,000 from a joint bank account she held with her husband, Micky. It was money he borrowed from his 401(k) to pay for household repairs and replace the family's aging minivan. But the IRS got there first, and then it slapped a lien on their home.
 BACK 1 2 3
4 NEXT 
|
|
MAGAZINE
