Website design By BotEap.comIn connection with year-end tax planning, much has been written about accelerating or deferring deductions. The sometimes overlooked issue of accelerating or deferring revenue deserves equal attention, especially for those on the Alternative Minimum Tax. This article will discuss what to consider when planning for revenue recognition, including a summary of the different types of revenue to which this planning can be applied.

Website design By BotEap.comWhat happens to the AMT calculation when income level changes?

Website design By BotEap.comThe tax brackets of the Alternative Minimum Tax are progressive, the same as those of the Regular Tax. What this means in simple terms is that additional amounts of income are taxed at a higher rate than the tax rates that apply to lower levels of income. The Regular Tax has six sections, ranging from 10% to 35%, while the AMT has only two: 26% and 28%. However, as will be explained below, there are other adjustments to the taxable income calculation that can actually make these reported tax brackets significantly higher.

Website design By BotEap.comWhich are the real AMT supports?

Website design By BotEap.comIn calculating the Alternative Minimum Tax, an individual is allowed to subtract an exemption amount from what would otherwise be taxable income. The amount of this exemption is $74,450 for a couple married in 2011. However, as discussed in previous articles, the exemption phases out as the taxpayer’s income increases. This phase-out has the direct effect, therefore, of increasing the effective AMT tax rates for people in this phase-out range.

Website design By BotEap.comFor 2011, for the married couple, the elimination begins at $150,000 and does not end until their income exceeds $440,000. Within this range, each $100 increase in income will result in a $25 loss of the AMT exemption. The result is that an alternative minimum tax bracket of 28% is increased by a factor of 25%, resulting in an effective AMT tax bracket of 35%!

Website design By BotEap.comWhat does all this mean for planning?

Website design By BotEap.comKnowing one’s effective tax bracket is the only way to do proper AMT planning. It can be a costly mistake to deliberately speed up revenue, thinking one is in a lower Alternative Minimum Tax bracket than the Regular Tax bracket, only to discover that this is actually not the case. Many year-end tax planning articles routinely suggest that people on the AMT do exactly this, but not knowing what your effective AMT tax rate is could become a costly mistake.

Website design By BotEap.comWhat types of income can be accelerated or deferred?

Website design By BotEap.comThe answer to this question will depend on the situation of each individual, that is, if the person works for someone else or self-employed, what type of investments they have, etc. Below is a brief overview of some of the types of income a person can accelerate or defer to the end of the year.

Website design By BotEap.com– Employee compensation, such as bonuses and stock options.

Website design By BotEap.comSome employers allow employees the option of taking their bonuses now or deferring them to a future year. Additionally, employees may be granted stock options, and when these options are exercised is entirely up to the employee: they can be exercised just as easily in December as they are in January. If the employee has what are known as non-qualified stock options, the taxable income will be recognized immediately on the exercise date, both for AMT and Regular Tax purposes. If the options are qualified options (more commonly known as incentive stock options, or ISOs), there is no taxable income on the exercise date for Regular Tax purposes, but there is for Alternative Minimum Tax.

Website design By BotEap.com– Business income from self-employment, LLCs or partnerships

Website design By BotEap.comA company generally has some degree of control at the end of the year over its net income for the last month of the fiscal year. For example, a cash method business could pay outstanding invoices in December to reduce income, or wait to pay them in January, which would directly affect the amount of income reported on the business owner’s tax return. The company could also refrain from sending certain invoices towards the end of the year, thus postponing revenue to the following year.

Website design By BotEap.com– investment income

Website design By BotEap.comHere are some thoughts on acceleration or deferral in some types of investments:

Website design By BotEap.comCapital gains– An individual has complete control over the timing of any investment sale, so capital gains could easily be recognized this year or next.

Website design By BotEap.comrental income– a landlord can request that the rent check that is due on January 1 be paid a few days before.

Website design By BotEap.comInterest and dividends– As a longer-term strategy, an individual could enter or exit dividend-paying bonds and/or stocks to affect the amount of interest and dividend income received on a current basis.

Website design By BotEap.comConclusion

Website design By BotEap.comKnowing which tax bracket the taxpayer is in is essential for any tax planning, but especially for people in the Alternative Minimum Tax. The only way to minimize AMT is to take a little time as we get closer to the end of the year to look at the options available in terms of what revenue could move between 2011 and 2012, and then determine which of these options will result in the charge. lower tax. With the holiday season keeping everyone pretty busy, it’s never too early to start doing this!