With the end of the year approaching, we’d like to focus on AMT implications and particularly how they relate to year end State tax payments.
Alternative minimum tax (AMT) is an additional tax that some people have to pay on top of their regular income tax. It was created in the late 1960s because some high-income earners were legally using deductions, credits and other tax breaks to pay little to no federal income tax. Alternative minimum tax was instituted to make the system fairer.
However, AMT has never been indexed to inflation like our regular income tax brackets are, so every year more and more people become subject to the AMT. It is estimated that almost 40% of all taxpayers will get hit by AMT in 2011. While Congress attempts to “patch” the reach of AMT each year by increasing the exemption amount, the tax still affects more tax payers than ever intended. For 2011, the exemptions are $74,450 (married, filing jointly) and $48,450 (single or Head of Household). Without further Congressional help in 2012, the exemption reverts to $45,000 and $37,750, respectively.
How Do You Know If You Are subject to AMT?
Taxpayers need to compute their taxes the standard way using adjusted gross income, minus your deductions and exemptions, and the AMT way, adjusted gross income, minus any itemized deductions. However, you don’t get what’s called “preference deduction items” or many of your itemized deductions like taxes, and you are limited on others like medical and home mortgage interest. Then you add back items that are considered “preference income items,” and then you apply your AMT exemption. If that number is below $175,000 your AMT rate is 26%, above that and your rate is 28%. Unfortunately, you then compare both tax computations and pay the higher.
How Does State Tax Figure In?
Every state requires you to pay your taxes throughout the year, generally done through withholding or quarterly estimated payments. Now, two key rules apply in Georgia, and most states.
- No state requires that you pay 100% of your current state tax liability. Usually you must pay in between 70% and 90% of the current year’s liability.
- Fourth quarter estimated tax payments are not actually due until January 15th, 2012. However, since state income taxes paid by December 31, 2011 will be deductible in 2011. Many taxpayers like to pay before the due date to increase their deduction.
As mentioned above, taxes are one of the so called “preference” items and as such are not allowed as a deduction for AMT purposes. So if you know that you will be subject to AMT, you may want to consider whether or not you need to make the fourth quarter state estimated tax payment in December since you have until Jan. 15th, 2012 to actually make it.
Being subject to AMT and making the payment in December will be of no tax benefit to you since AMT will not allow the deduction and remember you pay the higher of regular tax or AMT tax. Therefore the AMT strategy is to control that last 10% to 30% to equal 100% of your state tax liability. Since you have the choice of writing the check for the fourth quarter payment in December or January, you can have a direct impact on the AMT you eventually pay.
At Henssler Financial we believe you should Live Ready, and that includes understanding how alternative minimum tax may affect you. If you would like to speak with one of our tax experts, call 770-429-9166 or email us at experts@henssler.com.