Finances

Alternative Minimum Tax: Investing in Your Practice May Reduce Your Tax Bill

By Adam Cmejla, CMFC

SYNOPSIS

Understanding the alternative minimum tax can save you money. In fact, investing in your practice may reduce your tax load.

ACTION POINTS

CALCULATE AMT. AMTI (AMT Income)equals AGI (adjusted gross income) minus itemized deductions plus AMT preference items.
KNOW IF YOU’RE SUBJECT TO AMT. If your AMTI is above $82,100 and you file “married filing jointly,” or it’s above $52,800 as a single taxpayer, you may have to pay this tax.

ALLEVIATE AMT. Accelerate income into the current year and defer the itemized deductions that are disallowed for AMT purposes into the following year.

You may be required to pay more taxes than you think. The Alternative Minimum Tax (AMT) was enacted to ensure that high income earners could not “skirt” the tax system by using complicated loop holes and other provisions to avoid paying taxes. Fortunately, there is a way to reduce this tax burden. As a financial adviser specializing in working with optometrists, and the husband of an independent OD, I know first-hand how fully understanding all of your taxes can better help you manage your practice finances.

IRS RESOURCE

Click HERE to learn more from the IRS about the Alternative Minimum Tax.

Calculate AMT

AMT is calculated from AMTI (AMT Income), which equals AGI (adjusted gross income) minus itemized deductions plus AMT preference items. The list of preference items is too long to fit into this article, so one planning piece when considering making investments is to ask yourself or your financial professional whether the gains and/or income on the investment is subject to AMTI.

You may wonder,“How do I know if I’m subject to AMT?” The most straight-forward way to answer that question: if your AMTI is above $82,100 and you file “married filing jointly,” or it’s above $52,800 as a single taxpayer, you’ll have to go through the calculation process to determine if you owe more taxes than you’ve already paid through the traditional tax calculation process. After calculation, if your AMT liability is more than your regular tax liability, your “AMT tax” will be the difference between the numbers.

To find out if you paid AMT taxes, you’ll want to look on page two of your Form 1040 and look at Line 45.

Strategies to Alleviate AMT

As an optometric business owner, it’s important to understand that you have some flexibility in your compensation that can help alleviate or possibly eliminate alternative minimum tax.

You can reduce your AMT tax burden by accelerating income into the current year and defer the itemized deductions that are disallowed for AMT purposes into the following year. The idea behind accelerating income into an AMT year is that it may be better to have the income taxed this year at 26 percent or 28 percent (AMT tax rates; rules apply) rather than in a non-AMT year in the future, when the income may be taxed at rates as high as 39.6 percent (2014’s top marginal tax bracket).

On the other side of the equation, the practice owner could decrease net income of the business this year that flows through to the owner’s personal return. Strategies include:
Equipment Purchase.Purchasing additional equipment that’s needed in the practice.

Add retirement plan. Implementing an additional retirement plan solution to shelter income inside of the practice. This can also serve as a positive retention tool for staff and/or associate ODs that you have in the practice. By introducing a vesting schedule on employer contributions to a retirement plan, it’s a way to build loyalty with the practice. Should an employee leave before full vesting occurs, those assets stay with the practice in the retirement plan.

Losses. Consider loss harvesting in some investment accounts. Capital losses can be used to offset gains, which reduces your AGI and thus your exposure to AMT. Any leftover capital losses above the current IRS limit of $3,000 are able to be carried forward against AGI in future years.
Careful planning over a two- to three-year period is often necessary to properly gauge the full impact of the AMT. I do not give tax advice, nor does Cambridge Investment Research, which my firm works with. Weencourage everyone to consult their qualified tax professional. This discussion of planning illustrates the importance of working with a qualified CPA to help understand the complexities of these circumstances.*

Tax law affects the investment environment, your investment decisions, and can have a profound effect on your long-term financial success. Ensuring that your assets and financial strategies are working as tax-efficient as possible is imperative to maximizing your potential returns.

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Adam Cmejla, CMFC, based in Carmel, Ind.,is president of Integrated Planning & Wealth Management, LLC, a financial planning and investment management firm “focused on working with optometrists to help them achieve their true financial potential, build financial confidence and clarity, and “delivering kindness and compassion to every relationship they’re privileged to serve.” Contact: 317-853-6777 or adam@integratedpwm.com.

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