ALTERNATIVE MINIMUM TAX
In a nutshell, the AMT is an alternative to the regular income tax system. After calculating your regular income tax, you re-calculate your taxes using an “alternative” system. If the AMT is higher than your regular income tax, you pay the higher amount. In calculating the amount of income subject to the AMT, taxpayers are not allowed certain deductions and credits that are available under the regular tax system. These include state and local income taxes, un-reimbursed business expenses, and certain medical expenses. While the AMT rates are only 26% and 28%, they are applied to a broader tax base, thus causing a tax problem for a growing number of middle-class taxpayers, not just the very wealthy taxpayers it was originally intended to tax.
-- The Charitable Alternative --
If you will be subject to the AMT, relief may come from an unsuspected source - your charitable gifts. Many people do not realize that the charitable deduction provides savings under both the regular and alternative system. Additional charitable gifts claimed as itemized deductions for regular income tax purposes can serve to reduce the difference between the regular income tax and the alternative income tax. In this way, it is possible to reduce or possibly eliminate the additional AMT levy that otherwise would be due.
By making early calculations, you may be able to determine the impact of additional charitable gifts on the AMT. Accelerating pledge commitments or making larger than ordinary gifts within the allowable 50% and 30% AGI limitations should be considered. You may want to consider using appreciated property such as stocks, bonds, and other securities for this purpose. For charitable purposes, these gifts are deductible at full fair market value, including any paper profit. If the same stock were sold, the capital gain element could cause additional AMT to be due.
As growing numbers of donors are caught by the AMT, many are under the mistaken impression that charitable gifts provide no tax benefits under the alternative tax. To avoid mistakes in planning based on this erroneous assumption, be sure that you and your advisors understand that charitable gifts can reduce both the regular and alternative tax liability.
THINK ABOUT YOUR POST, YOUR VETERANS, AND THE AMT THIS FALL.
It could save you some money. Give it to the American Legion rather than the IRS – it’s all the same to them and it follows the rules.