Investment Strategies to Reduce Alternative Minimum Tax

With the ever-changing tax world, it is growing increasingly difficult to know how every piece of legislation or industry update affects clients and impacts their financial future. As a leader in the financial services industry for the past 30 years, we get it. That’s why HD Vest Financial Services® is constantly seeking ways to share the latest knowledge we acquire with you. We’ve created the Taxes & Investments: Timely and Timeless Strategies Series to share timely information and provide our Advisors and their clients with practical information and ideas they can build on.

A serious concern for many Americans today is the Alternative Minimum Tax (AMT). What started as a “wealthy person’s” tax has now begun to affect middle-class America. According to IRS Publication 505, making more than $52,800 single or $82,100 joint in 2014 may subject a taxpayer to this
controversial tax.

Who might be subject to AMT?

Taxpayers with higher-than-average incomes, who are married and have more than two children, own a home and live in a state with high-income taxes such as California, New York or Michigan, are more likely to be subjected to AMT.

This is because many of the usual deductions and exemptions typically claimed each year are no longer allowed. These include dependents or children, state income taxes, property taxes, interest on second mortgages or home-equity loans, and high medical expenses. AMT rules also count interest from some private-activity bonds as income in addition to requiring taxpayers to pay tax on the spread of incentive stock options. Without these deductions and exemptions, taxable income may become significantly higher.

How can the AMT be reduced?

Do you want to reduce the AMT or potentially avoid it altogether? Here are some steps to follow to minimize the AMT:

• AMT-free municipal securities
  • Municipal securities that do not receive income from private activities are not subject to AMT. A municipal security is only subject to AMT if it invests in securities that involve privateactivities.
• Spread out your gains
  • If possible, spread out your capital gains from securities sales or the exercise of incentive stock options over many years.
• Income Deferral Vehicles
  • Investors may choose to place assets into retirement vehicles that allow a taxpayer to defer income to years which they may not be subject to AMT.
• Life insurance
  • Life insurance provides a way to pay premiums and then take tax-free loans of accumulated cash value. Loans from life insurance are not subject to AMT. If an insurance policy is a modified endowment contract, however, ordinary income taxes may apply.

While considering the AMT, it is important to remember to plan an investment strategy around risk tolerance, time horizon and objectives. An HD Vest Advisor can help carefully outline the pros and cons of any AMT strategy and what impact it may have on a retirement and cash flow plan. Consult with an Advisor today to put an appropriate plan in place and then fine-tune the strategy for AMT if possible.