Alternative Minimum Tax
The alternative minimum tax or AMT as it is called, is raising an ugly head that should scare many middle income Americans to death. In 2011 you didn’t have to worry about the AMT until you had an AGI of about $75,000 (married couple filing jointly). In 2012 the AMT will get you as soon as you hit $45,000.
Basically, you’ll pay a minimum tax of 26% over the $45,000 until you hit over $200,000 and then the alternative minimum tax rate jumps to 28%. The alternative minimum tax is calculated separate and apart from your normal income tax.
The bottom line is you are going to be looking at a substantial out of pocket jump in your taxes. That’s less money you have to spend
Unfortunately, there isn’t a lot you can do as a W2 tax payer to lower your exposure to the AMT.
LLC Operating Agreement = Key Tax Tool
However, your home business can do a lot to help
LLC Operating Agreement Is a Key Tax Tool
The best mix of asset protection and tax advantages comes from an LLC. The LLC can be taxed as if it were a corporation, partnership or sole proprietorship. The tax choice needs to be authorized in the LLC operating agreement
Your LLC operating agreement should have a section of taxes. In that part of the LLC operating agreement, you will define or “authorize” how you want your LLC to be taxed. The LLC operating agreement will also authorize things like retirement plans and benefit plans.
Many of the “internet” LLC operating agreements don’t adequately address these issues. Your LLC operating agreement should be about 20-30 pages long in order to address the minimum issues it should be addressing.
Once the LLC operating agreement is properly structured, your LLC becomes your most important tax planning tool. The “deductions” your LLC gets comes off your taxes “above the line,” which means it lowers your adjusted gross income (AGI).
If you can lower you AGI below the alternative minimum tax exemption limit ($45,000 in 2012 for example) then you can get out of the cold reach of the AMT. Even if you can’t get below the alternative minimum tax exemption mark, almost all for the expenses and deductions that you rack up in your LLC will cut your AMT calculation.
This is a big deal, because many of your personal deductions and exemptions are included in the alternative minimum tax calculations. More or less, they don’t count and they are lumped back into your income when the AMT is calculated.
When you use your LLC and the LLC operating agreement is written properly, there are a lot of tax tips that will help lower your income when it comes to the alternative minimum tax calculations.
