When it comes to tax planning, nothing is simple. For example, first you need to consider your marginal tax rate—this is the regular rate you'll pay on your next dollar of "ordinary income" (salary, business income, interest, and more).
Then there’s the alternative minimum tax ("AMT"), which was designed to ensure wealthy taxpayers with “excessive” deductions would pay some income tax. The top AMT rate is lower than the top regular income tax rate on ordinary income. (See the Charts “2016 individual income tax rate schedules.” and “2015 individual income tax rate schedules.”) But the AMT rate typically applies to a higher taxable income base. So if you plan only for regular income taxes, it can result in unwelcome tax surprises.
You also need to consider the various tax deductions and credits that could save you taxes. On the other hand, income-based phaseouts and other limits can reduce or eliminate the benefits of these breaks, effectively increasing your marginal tax rate.
That’s why, no matter what your situation, it’s important to review your income, expenses, and potential tax liability throughout the year, keeping in mind the many rates and limits that can affect income tax liability—and keeping an eye out for additional tax law changes. Only then can you time income and expenses to your advantage.
Seek the services of a legal or tax adviser before implementing any ideas contained in this blog.