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Myths - Accelerate Income if You are Affected by AMT

Financial advisors have recommended that those affected by Alternative Minimum Tax (AMT) accelerate their income into years where the AMT applies. This is because the top AMT tax rate is currently 28% compared to the top federal income tax rate of 35%, so at first glance it appears that one would pay less taxes on any income received in a year that the AMT applies. Unfortunately, this is false for the following reason:

By paying AMT tax, you do not avoid paying federal income tax. Thus, the notion that you are paying less tax with the AMT at a 28% tax rate versus the 35% tax rate is totally false. In fact, if the AMT is a temporary situation for you (only affects you for a few years, not for your whole lifetime), you will pay the same amount of taxes with or without the AMT. However, the AMT will require some of your taxes to be accelerated.

For example, if you are in the highest tax bracket for the next two years, and you take the advice of accelerating $10,000 of your income (e.g., you accelerate income from January 15 to December 31), your taxes will be affected as follows:

By accelerating your income by $10,000, your AMT will increase by $2,800 (28% of $10,000) and your federal tax would increase by $3,500 (35% of $10,000) in year 1. Of course, your income and taxes in year 2 would be decreased by a similar amount due to the income being accelerated and taxes being already paid on it.

	Without Acceleration	With Acceleration
Year 1	Fed Tax - $40,000 w/ AMT - $45,000 Total Tax - $45,000 AMT - $5,000	Fed Tax - $43,500 w/ AMT - $47,800 Total Tax - $47,800 AMT - $4,300
Year 2	Fed Tax - $50,000 w/ AMT - $44,000 Total Tax - $45,000* AMT - $0	Fed Tax - $46,500 w/ AMT - $41,200 Total Tax - $42,800* AMT - $0
Total	Fed Tax - $90,000 w/ AMT - $89,000 Total Tax - $90,000	Fed Tax - $90,000 w/ AMT - $89,000 Total Tax - $90,000

* Total tax reflects that $5,000 and $4,300 are paid in additional AMT tax in the year before and is used as a credit in calculating regular Federal tax in future years (as long as Fed Tax with previous AMT credits is still greater than tax with AMT). Tax without acceleration = maximum ($50,000 - $5,000 = $45,000 or $44,000). Tax with acceleration = maximum ($46,500 - $4,300 = $42,800 and $41,200)

By accelerating your income to take advantage of the lower taxes under AMT, you only accelerate the timing of your taxes.

There are only a few times when it makes sense to accelerate your income for tax purposes. One of these times is when an increase in income tax rates or capital gains rate is anticipated. In those situations you want to take advantage of the lower tax rates before they increase.

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