The AMT: Pitfalls and Solutions

Brown, Cal
February 2005
Journal of Financial Planning;Feb2005, Vol. 18 Issue 2, p70
Academic Journal
• The alternative minimum tax is affecting an increasing number of people, particularly those with annual incomes between $150,000 and $500,000. Consequently, financial advisors need to be conversant with the details of the AMT. • Advisors need to be especially alert to the AMT for clients who have modest incomes and a large number of children, take the standard deduction, live in a high-tax state, or have large capital gains, incentive stock options, and private activity bonds. • Clients, such as retirees who no longer claim itemized deductions, may be vulnerable because they can't take the standard deduction in AMT. Clients in high-tax states may want to consider timing any estimated state-tax payments or moving to another state. • Planners should caution clients that interest for home equity loans and lines of credit not used to buy, build, or improve a residence is not deductible under the AMT. • While capital gains receive the same reduced rates under the AMT as they do the regular tax return, the AMT can still be triggered if the capital gains are large enough because the AMT exemption phases out. • Incentive stock options are particularly complex for the AMT. The exercise of an ISO can create an the AMT liability If the stock is held at least 12 months following its exercise. Advisors may need to consider a "disqualifying disposition" of the stock so that it does not qualify for long-term capital gains treatment. • Interest from private-activity bonds is a preference item under the AMT, so be cautious when recommending municipal-bond funds where a portion of the portfolio might be AMT bonds. INSET: Executive Summary.


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