Understanding the Impact of AMT Changes in 2024 and How to Plan for It
In 2024, significant changes have been made to the Alternative Minimum Tax (AMT) system, and it’s important for taxpayers to understand these changes to avoid unexpected tax liabilities. The AMT is designed to ensure that high-income earners pay a minimum amount of tax, even if they have substantial deductions, credits, or exemptions that would otherwise reduce their taxable income. For individuals selling businesses and utilizing the offsetting capital gains deduction to shelter up to $1,250,000 of proceeds, these changes can have a significant impact.
While the capital gains deduction has long been a tool for taxpayers to minimize the tax burden when selling a business, the recent AMT changes could result in taxes owed when taxpayers thought they wouldn’t have to pay. This is especially true for individuals in higher tax brackets who expect to benefit from these deductions but end up facing the AMT. The good news is that with careful planning, it’s possible to avoid or minimize this tax impact. It’s essential to understand how the system works and how you can plan to recover the tax within the 7-year carryover period before it expires.
What You Need to Know About AMT and Its Impact
The AMT operates as an alternative tax calculation. If your tax deductions and credits reduce your taxable income too much, you could be subject to AMT. This is where the surprise hits, especially for people selling their businesses. Many of our clients come to us thinking that by claiming their capital gains deduction, they can shelter up to $1,250,000 from tax. Unfortunately, what they don’t realize is that the AMT system could result in them owing taxes, even when they expected none.
The introduction of these new changes in 2024 means more individuals will be subject to AMT, even if they haven’t been before. Specifically, the changes include modifications to the way income is calculated, which could result in more people being caught by the AMT system. These modifications are likely to affect individuals with higher income, significant capital gains, or large tax deductions. The number of taxpayers subject to AMT is expected to rise significantly due to these updates.
Who Is Most Affected by the 2024 AMT Changes?
While the changes to the AMT system affect a broad range of taxpayers, they are most impactful for those with significant capital gains, especially business owners selling their companies. Here’s who is most likely to feel the effects:
Business owners who are selling their businesses and looking to claim the capital gains deduction to shelter up to $1,250,000.
High-income individuals in higher tax brackets who are using deductions and credits to lower their taxable income.
People with large capital gains who expect to use offsetting deductions but end up with an AMT liability.
Those who didn’t know about the AMT—many individuals are surprised when they realize AMT applies and they owe taxes unexpectedly.
Many business owners selling their companies may think they are fully utilizing their capital gains deduction to avoid taxes, but if the AMT applies, it can turn their tax plans upside down.
How to Plan for AMT and Recover Tax
AMT isn’t a one-time issue—you have an opportunity to recover the extra tax paid through a 7-year carryover period. This period allows you to apply excess AMT paid against your future taxes. To make the most of this, it’s crucial to plan ahead, track your AMT payments, and consult a tax expert. Here are some steps to consider:
Monitor your AMT liability: After your business sale, review your tax filings to check if AMT applies and how much you’ve paid.
Strategize for future taxes: Use the 7-year carryover period to apply excess AMT payments to future taxes.
Work with a tax professional: A tax professional can help you adjust your filings and tax strategies to minimize the impact of AMT.
Plan business sales carefully: Work with your tax advisor to structure your business sale in a way that minimizes AMT exposure.
Review your deductions: Evaluate which deductions and credits could trigger AMT and adjust your tax planning accordingly.
Preparing for the 7-Year Carryover Period
While AMT can be a frustrating and unexpected cost, it’s important to know that there is an opportunity to recover these taxes over a 7-year period. Taxpayers can carry forward any excess AMT paid and use it to offset future tax liabilities. This 7-year window gives you the chance to reduce your overall tax burden if you plan wisely.
To make the most of this, ensure that you keep detailed records of your AMT payments and consult with a tax professional every year to ensure you're maximizing your tax recovery opportunities.
Conclusion
The changes to AMT in 2024 can catch many taxpayers off guard, especially those selling businesses and hoping to shelter significant capital gains. Understanding how AMT works, who is most impacted, and how to plan for it can help you avoid surprises and reclaim the taxes paid during the 7-year carryover period. Make sure to work closely with your tax advisor to navigate these changes and develop a strategy that minimizes your tax liability. By staying informed and proactive, you can take control of your tax situation and plan accordingly for a successful financial future.
Disclaimer: The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a newsletter such as this, a further review should be done by a qualified professional.
No individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.