Alternative Minimum Tax & Donor Advised FundsSubmitted by American Endowment Foundation on September 14th, 2020
By Eric Kinaitis
Thanks to the Tax Cuts and Jobs Act, the several million households that used to be at risk of paying the alternative minimum tax (AMT) have been spared. However, there are still 150,000 unlucky HNW households where the AMT can still strike.
Although the topic of the AMT may normally be considered the realm of a CPA, understanding how a financial advisor can play a role in protecting their high earning clients from the pain that the AMT can inflict and yet still provide an investment portfolio that can provide the best after-tax return possible is key. The article’s author put it well: “Any successful investment advisor understands that it’s not about the return you earn; it’s about the return you keep.”
A brief history lesson: The alternative minimum tax came into existence in 1970. It originated when the Treasury Department in 1969 determined that 155 wealthy individuals were able to pay no income tax due to their adept use of current tax loopholes at that time. This created immense political pressure on Congress; more persons wrote to members of Congress that year about this issue than the Vietnam War.
Congress enacted the AMT to essentially be an alternative tax system, with its rules and rates designed to keep those with high incomes from using tax loopholes in an effort to pay little or no tax.
The AMT has its own rules on what is taxable, what can be deductible and how the tax is calculated. In a nutshell, a taxpayer determines their tax both through the AMT and the traditional tax system and then they owe on whichever bill is higher.
Is there any surefire way to know exactly who can suffer the AMT? Not really; a report on CNBC in 2013 indicated a wide array of potential triggers, with the average AMT bill being between $2000 -$15,000 at that time.
As a financial advisor, one of the ways you can aid a client who is affected by AMT is through a donor advised fund (DAF). If your client is subject to AMT, their contribution into a DAF will reduce the impact of the alternative minimum tax.
Additionally, a contribution into a DAF provides four other tax benefits:
1.) Income Tax Deduction: Your client can receive an immediate income tax deduction in the year you contribute to your DAF. Since a donor advised fund administrator is a public charity, contributions immediately qualify for maximum income tax benefits. The IRS does mandate some limitations, depending upon the clients’ adjusted gross income (AGI):
- Deduction for cash – up to 60 % of AGI.
- Deduction for securities and other appreciated assets – up to 30 % of AGI.
- There is a five-year carry-forward for unused deductions.
2.) Capital Gains Tax: The client would incur no capital gains tax on gifts of appreciated assets (i.e. publicly-traded securities, closely-held stock, real estate, other illiquid assets.)
3.) Estate Tax: The DAF is not subject to estate taxes.
4.) Tax-Free Growth: The investments within a donor advised fund can appreciate tax-free, leaving more money for your client to use toward their charitable interests.
Call us at 1-888-660-4508 or contact us to help you determine if a donor advised fund at AEF can be of service to you and your client.
Note: The information provided herein is for informational purposes only and should not be interpreted to constitute legal and/or tax advice. Donors should consult their legal and tax advisors regarding their specific situations.