How 'Stealth' Tax Surcharge in AMT Disrupts Marginal Tax Rate Planning Through Transaction Timing

A basic income tax planning technique is to defer income and to accelerate deductions. However, when an individual is in AMT for a given year, many argue that this planning technique is reversed (i.e., taxpayers in AMT in year 1 and not expecting to be in AMT in year 2 should accelerate taxable income into year 1). However, this article demonstrates that this advice may backfire for many taxpayers in AMT because of the “stealth tax” effect of the AMT exemption phase-out. The bands of income that are subject to AMT stealth tax marginal tax rate (MTR) distortion are as much as nearly $300,000, by far the largest of the dozens of stealth tax candidates in the tax law. For many AMT taxpayers, it is possible that accelerating income from year 2 to year 1 will subject it to stealth tax-affected rate of 32.5% or 35%, not 26% or 28%, while their regular MTR in year 2 may have been less than 32.5%.