Navigating Alternative Minimum Tax (AMT) for High-Income Earners

The Alternative Minimum Tax (AMT) is a critical consideration for taxpayers in higher tax brackets, often affecting those with incomes exceeding $200,000 annually. AMT functions as a parallel tax system, recalculating tax liability by adding back specific deductions disallowed under its rules, such as State and Local Taxes (SALT) and certain itemized deductions. For instance, SALT deductions are capped at $10,000 under standard tax rules but are fully disallowed under AMT, potentially increasing taxable income by thousands. Other common disallowances include miscellaneous itemized deductions subject to the 2% floor, like unreimbursed employee expenses and investment fees. Taxpayers should use advanced tax planning software to model AMT scenarios, as it can project liabilities based on variables like income fluctuations, exercise of incentive stock options, and large capital gains. Consulting a tax professional is essential for strategies such as timing deductions, leveraging AMT credits, and optimizing retirement contributions. Proactive planning, including annual AMT calculations, can help avoid surprises and reduce overall tax burden, aligning with long-term financial goals.