Posted July 1st, 2007

Charitable Giving and the Alternative Minimum Tax

The alternative minimum tax (AMT) was originally enacted as part of the 1969 Tax Reform Act. It was intended to catch a relatively small number of very wealthy persons who were not paying any income taxes. In recent years, however, millions of Americans have been caught in the AMT trap, including many upper middle-income taxpayers. If left unchanged, it has been estimated that as many as 30 million taxpayers could be affected by the AMT by 2010. This problem has been caused in part by the reduction of maximum regular income tax rates, increases in the AMT rate over time, failure to index AMT exemption amounts for inflation, and other factors.

Many members of Congress would like to eliminate the AMT or at least fix the current problems, but the cost in lost tax revenues has thus far prevented any permanent solutions from moving forward.

The AMT system

In a nutshell, the AMT is an alternative to the regular income tax system. After calculating your regular income tax, you re-calculate your taxes using an “alternative” system. If the AMT is higher than your regular income tax, you pay the higher amount. In calculating the amount of income subject to the AMT, taxpayers are not allowed certain deductions and credits that are available under the regular tax system. These include state and local income taxes, unreimbursed business expenses, and certain medical expenses. While the AMT rates are only 26% and 28%, they are applied to a broader tax base, thus causing a tax problem for a growing number of middle-class taxpayers, not just the very wealthy taxpayers it was originally intended to tax.

The charitable alternative

If you know or suspect that some of your donors will be subject to the AMT, relief may come from an unsuspected source—their charitable gifts. Many people do not realize that the charitable deduction provides savings under both the regular and alternative system. Additional charitable gifts claimed as itemized deductions for regular income tax purposes can serve to reduce the difference between the regular income tax and the alternative income tax. In this way, it is possible to reduce or possibly eliminate the additional AMT levy that otherwise would be due.

By making early calculations, taxpayers may be able to determine the impact of additional charitable gifts on the AMT. Accelerating pledge commitments or making larger than ordinary gifts within the allowable 50% and 30% AGI limitations should be considered. Donors may want to consider using appreciated property such as stocks, bonds, and other securities for this purpose. For charitable purposes, these gifts are deductible at full fair market value, including any paper profit. If the same stock were sold, the capital gain element could cause additional AMT to be due.

As growing numbers of donors are caught by the AMT, many are under the mistaken impression that charitable gifts provide no tax benefits under the alternative tax. To avoid mistakes in planning based on this erroneous assumption, be sure that donors and their advisors understand that charitable gifts can reduce both the regular and alternative tax liability.

The publisher of Give & Take is not engaged in rendering legal or tax advisory service. For advice and assistance in specific cases, the services of your own counsel should be obtained. Articles in Give & Take may generally be reprinted for distribution to board members and staff of nonprofit institutions and other non-donor groups. Proper credit must be given. Call for details.

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