Don't get bitten by this Awfully Mean Tax

• You claim big miscellaneous deductions. Are you an employee with substantial unreimbursed employee business expenses? Do you have huge investment or tax-preparation deductions? How about union dues or job-related continuing education? All of your miscellaneous itemized deductions are wiped out in the AMT computation. This increases your exposure to the AMT slam.

• You have extraordinary medical expenses. For the AMT, they have to be reduced by 10% of your adjusted gross income rather than the 7.5% allowed under the normal tax calculation.

• You exercise incentive stock options. The excess of the fair-market value received through the exercise of the option over the exercise price is a preference item. If you want to understand the concept of tax hell, exercise the options and then watch the value of your stock go down. In the first years of this decade, as stocks swooned, many taxpayers were slammed by the AMT while the value of their stock investments disappeared. You get taxed on a paper gain while your real net worth goes down.

What to do

If you're going to be hit with the AMT, your normal tax-planning rules are reversed. Instead of deferring income and accelerating deductions, the new game plan is to accelerate income and defer deductions. Non-AMT deductions are worthless, and any income is going to be taxed at a flat 26% or 28% rate.

Here's what you might consider to accelerate income:

• Take a prepayment of salary or bonuses.

• Redeem Series EE U.S. savings bonds or certificates of deposit.

• Recognize short-term gains on portfolio securities.

• Withdraw funds from tax-deferred investments if the anticipated future rates exceed current taxation.

Here's what you might consider for deferring non-AMT deductions:

• Defer making your estimated state income-tax payments until the next year.

• Defer paying your real-estate or personal-property taxes until the next year.

• Defer any medical expenses if the total doesn't exceed 10% of your AGI.

• Defer payment of any employee business expenses, union dues, job-education, investment and tax-preparation expenses.

• Spread the exercise of any incentive stock options over a multiyear period to minimize the amount of preference items in any single year.

Since these deductions aren't allowed in the computation of the AMT, if you're subject to the tax, those deductions are worthless at tax time.

The key to a successful defense against the AMT is planning. Your 2009 return will give you a good idea about whether you will be hit with the AMT on your 2010 taxes.

Video: Tax-filing audit triggers

So start doing your 2009 projections now and begin considering the strategies and techniques I suggest above to minimize your potential tax exposure in 2010. You can even think ahead to 2011.

You know the AMT is out there. You've been warned.

Updated Nov. 23, 2009

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