More On Tax Planningfrom The Advisor's Professional Library
- IRAs: In General Individual Retirement Accounts are highly popular tools for contributing funds that grow on a tax deferred basis. Depending on the type of IRA, the accumulation can be tax free.
- Annuities: Variable Annuities Annuities are hot. The tax rules vary with the circumstances. Advisors must be aware of these intricacies when discussing annuities with clients.
This is the 17th in a series of 23 tax tips tha AdvisorOne is publishing on each business day in March as part of our Tax Planning Special Report (see our Special Report calendar for a more complete list of topics to be covered and experts who will deliver their insights).
The tax tip today comes from Tim Speiss, partner and chairman, Personal Wealth Advisors, at EisnerAmper LLP. Speiss has provided comprehensive tax planning and investment, compensation, and financial planning services to executives, families and business owners for close to 30 years. Speiss holds a BS in business and MS in taxation from Widener University.
The Tip: Minimize AMT
Speiss (left) says EisnerAmper always works with clients around the alternative minimum tax (AMT), as most of them live in high-rate states—primarily in New Jersey, New York and California—and are subject to the add-back of state and local taxes, which are disallowed for the federal AMT calculation. “We work with our clients in a multi-year environment. We’re looking at the timing of their state tax payment in 2010, 2011 and 2012, and we’re trying to understand by punching up or deferring state income tax payments how they can minimize the AMT, and thinking about their income flows as well.”
One mechanism EisnerAmper might use is deferring where possible: in 2011, pushing off as much of 2011 taxes as possible into 2012, for example. Another possible strategy, depending on what 2012 bodes (“2012 looks like it’s going to be an AMT liability year”), is trying to accelerate state and local deductions into 2011 if that would help. “Often, even if you’re an AMT in both years, by trying to manage deductions so that you reduce your total tax liability would be a strategy.”
Speiss makes another point: “The AMT is not horrible. When you think about it, you’re paying an AMT tax rate of 28%; that’s still far less than a 35% ordinary income tax rate.”
He says EisnerAmper educates its clients that the AMT is not necessarily a catastrophe. “If you manage your affairs so you can be an AMT and not the ordinary rate of 35%, that could be a very good strategy. Suppose you knew in 2011 that you were going to be in the 35% tax regime, and also that you were going to be in a 35% tax rate in 2012, you might look at your state income tax payments and pay them out while purposely trying to put yourself in a AMT rate because your tax total tax liability would be less than the 35% amount.”
Speiss says that this kind of strategizing utilizes old-fashioned numbers crunching and looking at various scenarios, three or four per client. It is necessary to consider all of the taxpayer’s income over two or three years. The goal is to devise an income recognition and deduction payment scenario that gives the least tax liability in the two years.
See ourTax Planning Special Report calendar for a list of all the tax topics to be covered.