Certain provisions of the Economic Growth and Tax Relief Reconciliation Act created the ever popular 0% tax rate for long-term capital gains and qualified dividends for low-income taxpayers. However, an interesting tax planning opportunity arises for high net worth taxpayers whose significant itemized deductions trigger the alternative minimum tax (AMT).
It is common knowledge that in high income tax states such as California, New Jersey, and New York, most affluent taxpayers lose at least a portion of their state and local tax deductions to the AMT. The treatment of miscellaneous itemized deductions is worse. Even if they survive both the 2% income tax deduction floor and the §68(a) phase-out of itemized deduction rule (aka Pease limitation), the deductions are still not allowed against AMT.
Nevertheless, there is still an opportunity to squeeze into the 0% bracket.
Consider a retired couple with multiple real estate properties with an AGI in 2016 of $250,000, of which qualified dividends and long-term capital gains account for $75,000. The couple's itemized deductions - state sales/income taxes, real estate tax on all houses, deductible wealth management fees, etc. - total $170,000. Accounting for $8,100 in personal exemptions, their taxable income is a bit shy of $72,000. Since none of these deductions make it under the AMT regime, the couple's AMT tax liability will be significantly higher than their regular tax. However, they will still pay no federal tax on any of their dividends or capital gains.
The takeaway here is: Don't ignore the deductions just because you know they won't survive the AMT guillotine. The most often overlooked deductions are wealth/money management fees and estate planning fees. Also, for those in Florida, Nevada, Texas, Washington, and other no income tax states: save sales tax receipts from large taxable purchases, such as boats, cars, and planes. When added to real estate taxes and investment fees, these expenses may become tiebreakers that push you into the 0% bracket. Of course this approach should be done with the advice of you financial advisor and accountant who should weigh these moves against your whole financial picture.
Questions? Contact Oleg Ikhelson, CPA, J.D. or your Berdon advisor. Berdon LLP, New York Accountants