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How to Avoid Paying the Federal Alternative Minimum Tax

1.

Sign up for employee-sponsored health care plans. To be tax-deductible for AMT calculations, your health care spending must exceed 10 percent of your adjusted gross income, whereas health-related spending exceeding 7.5 percent of your income is tax-deductible when calculating regular tax liabilities. This disadvantage can largely be overcome by signing up for an employee-sponsored health plan, where health care premiums are deducted from your paycheck. Such deductions will reduce your taxable income, which will in turn lead to a decline in your regular tax liability as well as AMT.

2.

Negotiate with your employer to pay for your business expenses in exchange for a lower salary. If, for instance, you are a traveling salesperson and must pay out of pocket for gas and vehicle maintenance, ask your employer to pay these and give you a slightly lower salary in return. Such a strategy could reduce your taxes, as some business expenses are not deductible while calculating the AMT. It will likely benefit your employer too by lowering his payroll taxes.

3.

Consult a tax professional before exercising Incentive Stock Options (ISO). The date you exercise stock options granted by your employer as an incentive and the date you sell the shares that are obtained as a result make a difference in AMT calculations. Especially if a substantial amount of your income for the year will likely result from the exercise of stock options, consult with a tax-planning professional before you exercise the options.

4.

Avoid home equity loans to for non-housing expenses. Mortgage and home equity loan interest payments are deductible up to $100,000 in your regular tax return, even if the loan was used for purposes unrelated to the home. For AMT calculations, however, payments are only deductible if the loan was used to buy, build or improve the home. Therefore, you must think carefully before taking out a home equity line of credit to pay for personal expenses or unrelated purchases such as a car.



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