Understanding AMT's Impact on Charitable Giving
Much attention has been focused lately on the alternative minimum tax (AMT). This parallel tax system was created in 1969 to ensure that wealthy taxpayers (defined at that time as those with income over $200,000) didn't use loopholes to escape paying taxes. The AMT has its own set of rates and requires you to complete a separate set of computations.
While AMT rates themselves aren't very high—26% and 28%—if you find you are subject to the tax you could face a substantial bill. The reason: the AMT disallows many common regular tax deductions and credits. When calculating your potential AMT liability, you must add back or reduce these tax breaks and this gives you a higher income level that's then subject to the AMT rates.
If your calculation of your regular tax bill is as much (or more) than the alternative tax, you escape the AMT. But if your regular tax falls below the AMT amount, you have to make up the difference.Charitable gifts escape AMT restrictions
Fortunately, one of the few deductions still allowed under the AMT is charitable donations. Even if you are subject to the AMT, your charitable contributions will continue to reduce your tax liability.
Action Idea: Depending on your individual circumstances, you might be able to shift into another tax year some income and deductions that otherwise would force you into the AMT.
From a tax planning standpoint, if you expect to be subject to the AMT in the current tax year but you are generally in a marginal income tax bracket that is higher than the top 28% AMT rate (levied on income that is $175,000 above the exemption amount, $87,500 for married filing separately—the 26% rate applies to income above the exemption amount, but less than $175,000), you may want to consider postponing large charitable contributions to a year when you are not subject to the AMT. In a non-AMT tax year, your charitable income tax deduction will reduce your tax liability by more than in a year when you are subject to the AMT.
If, however, you expect to be subject to the AMT on a yearly basis, or you know that a charity you want to support needs to receive your donation this year to achieve its goals, you may want to take your charitable contributions as deductions this year, which will reduce your AMT liability, nevertheless.