February 2017
The Alternative Minimum Tax: Not Just for the Wealthy
The New Rules to Getting Upgraded on Your Next Flight
Frequently Asked Retirement Income Questions

The Alternative Minimum Tax: Not Just for the Wealthy

When first introduced, the alternative minimum tax (AMT) was widely acknowledged to be a rich person’s tax — a fallback tax for those wily taxpayers with big incomes and numerous deductions. However, as finances evolved and incomes grew, more and more people found themselves subject to the AMT, even after the introduction of automatic inflation adjustments in 2013. That’s why a general understanding of how the tax works can help you avoid it and even use it to your advantage.

The Other Federal Tax

The AMT truly functions as an alternative tax system. It has its own set of rates and rules for deductions, and they are more restrictive than the regular system. Taxpayers who meet certain tests essentially have to calculate their net tax liabilities under both sets of rules, and then file using whichever calculation yields the greater tax assessment.

The AMT can be triggered by a number of different variables. Although those with higher incomes are more susceptible to the tax, factors such as the amount of your exemptions or deductions can also prompt it. Even commonplace items such as a deduction for state income tax or interest on a second mortgage can set off the AMT. To find out if you are subject to the AMT, fill out the worksheets provided with the instructions to Form 1040 or complete Form 6251, Alternative Minimum Tax — Individuals.

AMT rates start at 26%, rising to 28% at higher income levels. This compares with regular federal tax rates, which start at 10% and step up to 39.6%. Although the AMT rates may appear to cap out at a lower rate than regular taxes, the AMT calculation allows significantly fewer deductions, making for a potentially bigger bottom-line tax bite. Unlike regular taxes, you cannot claim exemptions for yourself or other dependents, nor may you claim the standard deduction. You also cannot deduct state and local tax, property tax, and a number of other itemized deductions, including your home-equity loan interest, if the loan proceeds are not used for home improvements. Accordingly, the more exemptions and deductions you normally claim, the more likely it is that you’ll have an AMT liability.

There’s also an AMT credit that allows you to claim a credit on your tax return in future years for some of the extra taxes you paid under the AMT. However, you can only use the AMT credit in a year when you’re not paying the AMT. To apply for the credit, you’ll need to fill in yet another form, Form 8801, to see if you are eligible.


AMT Red Flags

Certain circumstances and tax items are likely to trigger the AMT:

  • If your gross income is above $100,000
  • If you have large numbers of personal exemptions
  • If you have significant itemized deductions for state and local taxes, home equity loan interest, deductible medical expenses, or other miscellaneous deductions
  • If you exercised incentive stock options (ISOs) during the year
  • If you had a large capital gain
  • If you own a business, rental properties, partnership interests, or corporation stock
If any of the above apply to you, you should complete the AMT worksheet when preparing your taxes. If you don’t, rest assured that the IRS will. And if they find that you owe AMT, they’ll add penalties and interest. Worse yet, not paying your AMT liability may trigger an IRS audit.

Averting Triggers for the AMT

Because large one-time gains and big deductions that trigger the AMT are sometimes controllable, you may be able to avoid or minimize the impact of the AMT by planning ahead. Here are some practical suggestions.

Time your capital gains. You may be able to delay an asset sale until after the end of the year, or spread a gain over a number of years by using an installment sale. If you’re looking to liquidate an investment with a long-term gain, you should review your AMT consequences and determine what impact such a sale might have.

Time your deductible expenses. When possible, time payments of state and local taxes, home-equity loan interest (if the loan proceeds are not used for home improvements), and other miscellaneous itemized deductions to fall in years when you won’t face the AMT. Since they are not AMT deductible, they will go unused in a year when you pay the AMT. The same holds true for medical deductions, which face stricter deduction rules for the AMT.

Look before you exercise. Exercising ISOs is a red flag for triggering the AMT. The AMT on ISO proceeds can be significant. Because ISO tax issues are complex, you should consult with your tax advisor before exercising ISOs.

Up Close: Incentive Stock Options and the AMT

When you exercise an incentive stock option, you must report an adjustment for AMT purposes. The adjustment equals the difference between the exercise price and the fair market price. EXAMPLE: You exercise an incentive stock option to purchase 1,000 shares of your company’s stock at $20 per share when the stock is trading at $50 per share. For AMT purposes, you must report an adjustment of $30,000 ([$50-$20] x 1000).

The New Rules to Getting Upgraded on Your Next Flight

Forget the old rules for upgrades. They don’t work. Experts tell what’s effective today. You need to know new techniques to score airline seat upgrades today.

It used to be the case that the path to a business or first class upgrade was straightforward for air travelers: unsold front-of-the-cabin seats were doled out, gratis, to members of the airline’s frequent flier program, with seats parceled out by rank of the fliers. Platinum level members scored first, gold next, silver last.

That was then, and today frequent fliers kvetch that they just about never see free upgrades. Even top elites complain.

And that just may open up a big opportunity for you to score if you know how the game is now played. Even if you don’t have elite status.

What’s going on? And—more importantly—what strategies land a flier upfront now?

The second question is key. Anybody who tells you there isn’t much difference between coach flights and business or first class has never sat upfront. You appreciate the difference even on an hour flight, but you love the difference on a five+ hour flight.

As for what’s going on, simple. It really has gotten close to impossible to score a free upgrade from coach to the front. Occasionally, yes, super elites—such as United 1K members who log 100,000+ miles per year—get upgraded. But even they no longer can depend on it. That’s because airlines—just about all of the domestic carriers—came to the same conclusion a few years ago. It’s a lot better for the bottom line to sell front of the plane seats, even at deep discounts, then it is to give them away.

Read that again, because for now that is the death knell for free upgrades for elites.

But smart frequent fliers are regrouping and deploying new strategies to get upfront.

For starters, said Joe Brancatelli, who blogs about business travel at JoeSentMe.com, stop worrying about attaining lower levels of elite status—it’s not worth the bother any more. Instead, said Brancatelli, “Look for a cheap upgrade to buy.” He elaborated: “They’ll pitch you a price when you buy a ticket. They’ll pitch you an upgrade at check-in. And some airlines (notably BA and LOT Polish) actually sell upgrades in flight.”

Brancatelli’s right. Pay attention and you’ll see many offers of upgraded seats before you fly. Always when you are actually buying the tickets. Always, too, a day or three before departure. Usually, too, when you check into the flight. Airlines really want to sell those seats.

How cheap is cheap? Rocky Horan, who blogs at BookingGuru, said he has seen even prime upgrades—such as United business class seats on the Honolulu-Los Angeles route—go for as little as $100.

Frequent fliers said they routinely see business class going for maybe $250 above coach on Los Angeles to New York cross-country flights.

At Hawaiian Airlines, you may be able to name your own price with its Bid Up tool which solicits passengers to make an offer—and the carrier just may accept it. El Al does something similar. A couple dozen more carriers (mainly international) do likewise in auctions usually 24 to 72 hours before takeoff.

You still want free? Paradoxically, you just may have better luck on international flights where, often, there remain empty seats upfront. How can one be yours? Matt Arney, CEO of TranslateNow, said that in a prior job he often flew—on coach tickets—to China and he made it a point to befriend the flight crew, most of whom he saw time and again. He continued: “I took the time to introduce myself and chat with them in the galley before the flight. In return for just being friendly, I was treated like royalty and upgraded to business or first class many times. I still make it a point to text several prior to my flight to see if they know anyone that may be working my flight. This has also helped with upgrades here in the U.S.”

But there is one other way to possibly score a free upgrade, said multiple experts. That’s because airlines have gotten so good at selling seats, often they sell more than they have in coach. But a flight may be oversold in coach—yet have empty seats upfront. That means the gate agent can sometimes solve his problem of too many bodies in coach by shifting a passenger to business class—freeing up a coach seat. Just ask the gate agent, “Is the flight oversold?” If he says yes, flat out ask if it’s possible to get upgraded to business class. The answer just may be, “sure,” said Kyle Stewart, travel editor at UPGRD.com. He added: “I have secured many upgrades this way.”

That’s right. Sometimes just asking politely still works when it comes to upgrades.

Source: TheStreet.com, Robert McGarvey, 2016

Frequently Asked Retirement Income Questions

When should I begin thinking about tapping my retirement assets and how should I go about doing so?
The answer to this question depends on when you expect to retire. Assuming you expect to retire between the ages of 62 and 67, you may want to begin the planning process in your mid- to late 50s. A series of meetings with your Capital Advantage financial advisor may help you make important decisions such as how your portfolio should be invested, when you can afford to retire, and how much you will be able to withdraw annually for living expenses. If you anticipate retiring earlier, or enjoying a longer working life, you may need to alter your planning threshold accordingly.

How much annual income am I likely to need?
While studies indicate that many people are likely to need between 60% and 80% of their final working year’s income to maintain their lifestyle after retiring, low-income and wealthy retirees may need closer to 90%. Because of the declining availability of traditional pensions and increasing financial stresses on Social Security, future retirees may have to rely more on income generated by personal investments than today’s retirees.

How much can I afford to withdraw from my assets for annual living expenses?
As you age, your financial affairs won’t remain static: Changes in inflation, investment returns, your desired lifestyle, and your life expectancy are important contributing factors. You may want to err on the side of caution and choose an annual withdrawal rate somewhat below 5%; of course, this depends on how much you have in your overall portfolio and how much you will need on a regular basis. The best way to target a withdrawal rate is to meet one-on-one with your Capital Advantage financial advisor and review your personal situation.

When planning portfolio withdrawals, is there a preferred strategy for which accounts are tapped first?
You may want to consider tapping taxable accounts first to maintain the tax benefits of your tax-deferred retirement accounts. If your expected dividends and interest payments from taxable accounts are not enough to meet your cash flow needs, you may want to consider liquidating certain assets. Selling losing positions in taxable accounts may allow you to offset current or future gains for tax purposes. Also, to maintain your target asset allocation, consider whether you should liquidate overweighted asset classes. Another potential strategy may be to consider withdrawing assets from tax-deferred accounts to which nondeductible contributions have been made, such as after-tax contributions to a 401(k) plan.

If you maintain a traditional IRA, a 401(k), 403(b), or 457 plan, in most cases, you must begin required minimum distributions (RMDs) after age 70½. The amount of the annual distribution is determined by your life expectancy and, potentially, the life expectancy of a beneficiary. RMDs don’t apply to Roth IRAs.

Are there other ways of getting income from investments besides liquidating assets?
One such strategy that uses fixed-income investments is bond laddering. A bond ladder is a portfolio of bonds with maturity dates that are evenly staggered so that a constant proportion of the bonds can potentially be redeemed at par value each year. As a portfolio management strategy, bond laddering may help you maintain a relatively consistent stream of income while managing your exposure to risk.1

When crafting a retirement portfolio, you need to make sure it is positioned to generate enough growth to prevent running out of money during your later years. You may want to maintain an investment mix with the goal of earning returns that exceed the rate of inflation. Dividing your portfolio among stocks, bonds, and cash investments may provide adequate exposure to some growth potential while trying to manage possible market setbacks.


1Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise. Bonds are subject to availability and change in price.