The alternative minimum tax (AMT) can affect your year-end planning if you have large amounts of preference items. If the AMT applies, and your regular taxable income is relatively small, year-end tax planning may have to be geared more to reducing the AMT than the regular tax.

The amount of AMT you must pay is the excess of his “tentative” minimum tax over your regular income tax. “Tentative” minimum tax, generally speaking, is 26% of the your AMT “taxable excess.” Your AMT “taxable excess” is your alternative minimum taxable income (i.e., his regular taxable income modified by certain preferences and adjustments) reduced by an exemption amount. To the extent that your AMT “taxable excess” exceeds $175,000, the AMT rate becomes 28%.

Without getting too complex with the numbers, suffice it to say . . . Married individuals filing jointly and surviving spouses get an exemption of $62,550, less 25% of AMTI exceeding $150,000 (zero exemption when AMTI is $400,200). For tax years beginning in 2007, the exemption amount will drop to $45,000 absent Congressional action.

AMT Credit. To the extent that your AMT is based on deferral preferences and adjustments (and not exclusion preferences and adjustments) and doesn't exceed the excess of your tentative AMT over your regular income tax, it may be carried forward as a credit against your regular income tax in later years. The amount of AMT attributable to deferral preferences is your total AMT reduced by the amount of AMT you would have to pay if you only had exclusion preferences and no deferral preferences

Exclusion preferences are preferences that permanently avoid the payment of taxes (e.g. tax exempt interest, state and local income taxes, percentage depletion in excess of basis).

Deferral preferences are those that merely delay the payment of taxes (e.g. certain accelerated depreciation, excess intangible drilling costs and certain tax shelter losses).

Planning. If you are consistently subject to the AMT, year after year, spread out preferences over two or more years rather than compressing them into one. This takes maximum advantage of the alternative minimum tax exemption amounts.

Since the alternative minimum tax is only paid when the tentative minimum tax exceeds the regular tax, a taxpayer's anticipated 2007 and 2008 regular tax must be considered in determining how much of his 2007 preferences and adjustments should be shifted into 2008. To shift preferences from one year, defer or accelerate the item from one year to the other. Pay or defer payment of state and local taxes, the exercise of incentive stock options, or the disposition of appreciated small business corporation stock.