AMT Alternate Minimum Tax - Details / Ideas on how to reduce it

I did a couple of searchers on this topic could not find anything. So my appologies if this has been discussed elsewhere.

Since there are many people here who are focused on Finances and some/many who seem to have done well for them selves, I figure this topic must be important to a lot of you.

I recently asked my accountant to do a projection on my (US) taxes for 2005 and he has infomed me that I will have to pay AMT for 2005. However he nor anyone else is able to explain to me (to my satisfaction) how one gets into this exclusive club (cynical smirk), what exactly it means (other than pay more to uncle Sam) and how if any way exists to (legit) reduce this additional tax burden.

Every year I have had deductions taken away, and now I am told I cant even get a full right off on my mortgage interest and property taxes.

Any and all help is appreciated.

Thank you.

www.irs.gov

and if your accountant cannot explain to you, maybe you should find another one.

I've read that if you're in the middle class, live in a high tax state (state income tax plus property tax), have kids then by the year 2010 you can expect to be paying 1000s in excess taxes unless the AMT law is changed. HELOC interest also won't count as a deduction if it wasn't used on the house. Some muni bonds are taxable under AMT. Depreciation is calculated differently for AMT (not to our benefit). Everyone complain to your congressmen or you will be stuck paying it soon. I've paid it the last 2 years and I don't have any loopholes or stock options. It's a ripoff.

What state were you from? If you come from CA or NY, you have a much higher chance of paying AMT.

Also, adding more income does not mean you can reduce your AMT. Because the AMT exemption is erased as your income increase and it is actually running at a faster pace that regular income tax. Use a tax software like TurboTax to help you figure that out.

AMT is taxed at 26% or 28%. By the time someone hit it, it is most likely 28%. You can look up the tax rate table to find out when the income tax rate exceed 28%. By the time you hit the 33% mark, there is a lot of catch up to do. AMT exemption will be erased faster than income tax owed. More income also means more state tax which is not deductible in AMT => widening the gap. I would say for someone just starting to pay AMT, he has to bring in $100K of income to offset the AMT.

Simply put, it is not likely someone can casually raise his income to dodge AMT. Everyone's situation is unique. Like I said, use a tax software like TurboTax to help you figure that out.

Again, it depends on which state you live in. If you live in CA and bought a home at $200K 10 years ago, you will be paying property tax on about $250K. If you buy a home for $500K, you will be paying twice the property tax. And guess what? Property tax is not deductible in AMT.

So, always use a tax software like TurboTax to help you figure that out

fboyfboy said:
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Again, it depends on which state you live in. If you live in CA and bought a home at $200K 10 years ago, you will be paying property tax on about $250K. If you buy a home for $500K, you will be paying twice the property tax. And guess what? Property tax is not deductible in AMT.

So, always use a tax software like TurboTax to help you figure that out

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It really doesn't depend on what state you live in for the AMT. The example I used was for avoiding the AMT, not for solving the quirks of California's property tax system. I don't think there's tax software on the market to help you out with that.

If you're right on the borderline of the AMT and you think you can escape it next year by contributing to a 401(k), you could try accelerating AMT deductions into this year, ie charitable deductions, January's mortgage payment, and see how that affects your tax projections.

Be careful in using tax software in predicting next year's AMT amount, however, since the AMT exemption amount is scheduled to go down dramactically and your software won't take that into account. You may want to wait until later in the year to accelerate any such deductions as the law could change during this year for next year and you may want those deductions for next year depending on your tax situation.

pmaggan said: Another AMT Link

Yup, that's the ticket. Also read the earlier thread listed by dcwilbur.

For those who have not yet reached the AMT floor on their income taxes (from which there is virtually no escape), there is a strategy I have been using to delay the inevitable.

Also see Preparing for the tax you never heard of (AMT).

Here's one other excerpt:

I'd like to correct one misperception. If you pay AMT, most advisors say that you should accelerate income to take advantage of the lower tax rate. This advice is almost always wrong: from $150k to $300k in gross income the AMT liability gets larger as income increases. This increase is due to the phase-out of the AMT credit which multiplies your supposed low AMT rate by 1.25. Not to mention the fact that you will pay 100% of the state income tax rather than some 70% if you pay it in a non-AMT year.

Bottom line: if you will owe AMT try to move state and local tax payments to another year, up to the point where your AMT just reaches zero. Do not accelerate income unless you run the numbers, and consider deferring income if you have that option.

If you will not owe AMT, consider accelerating state and local tax payments to reduce the chance that the AMT will bite you in the following year. The "tax you never heard of" thread explains this further. The point is that the AMT only leaves so much room for deductible state or local taxes, and you really should use 99% of it if you can rather than leave some of it on the table. If you "bank" some of these deductions in 2003, you will have that much more room in 2004.

slimcustomer said:
It really doesn't depend on what state you live in for the AMT. The example I used was for avoiding the AMT, not for solving the quirks of California's property tax system. I don't think there's tax software on the market to help you out with that.

Of course it matters what state you live in. State income taxes are non-deductible for the AMT tax. So if you live in a high state income tax state (e.g. CA or NY) opposed to a low tax state like (e.g. WA, NV or FL) then you will pay more AMT taxes. It is not a CA quirk. Also, the fewer the deductions the more of the AMT exemptions you lose.

CABERNET said:
cabernet stated:
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Of course it matters what state you live in. State income taxes are non-deductible for the AMT tax. So if you live in a high state income tax state (e.g. CA or NY) opposed to a low tax state like (e.g. WA, NV or FL) then you will pay more AMT taxes. It is not a CA quirk. Also, the fewer the deductions the more of the AMT exemptions you lose.
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My comments were in regards to real estate taxes. I'm sorry if they seemed out of context to the conversation.

The example I posted implicitly assumed similar taxation on two similarly priced homes. FboyFboy noted that in California you couldn't assume taxes would be similar based on his stipulations. That would be a California quirk along with the less than hand full of states that have some sort of property tax freeze scheme in place. In general the example works.

Slimcustomer: I'm sure you are right but I sure hope you are wrong. Time to move to a low tax state.

slimcustomer said: Here's a link from the Tax Policy Center that sums it all up.

Great link, slimcustomer. No one ever contacts their congressmen until they are hit with the AMT tax. By then it's 2 years too late. Everyone, do it now!

Raven1 said: Does this mean that none of the cash out would be tax deductible if you have reached the the AMT level? Is there any tax benefit involved in doing a cash out refinance i.e. writing off investment proceeds?Don't trust anything you read here. Go to the source on issues like this:

Instructions for IRS Form 6241

One update - the IRS guidelines were a little screwy, implying that interest on a refinance of an original mortgage was not deductible for AMT purposes. That issue has been clarified here:

IRS Clarifies AMT Deduction for Home Mortgage Interest

dcwilbur said:

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Don't trust anything you read here.

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Please clarify so we can improve the quality of this thread.

dcwilbur said:

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One update - the IRS guidelines were a little screwy, implying that interest on a refinance of an original mortgage was not deductible for AMT purposes. That issue has been clarified here:

IRS Clarifies AMT Deduction for Home Mortgage Interest

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I would expect to see more clarifications from the IRS on the AMT as exponentially more people are caught up in the AMT and inconsistencies and conflicts are flushed out.

The WSJ's Tom Herman writes:

This problem is getting so severe that we could see major changes within a year or two. It's simply too big to ignore.

(snip)

If Congress does nothing, the number of people hit by the AMT will soar from about 3.8 million this year to more than 20 million next year, according to Treasury Department estimates. Inaction clearly represents a formula for a political uproar, and many senators and congressmen are keenly aware of that.

Among the senators who support repeal of the AMT for individuals are Senate Finance Committee Chairman Chuck Grassley, an Iowa Republican, and Montana Sen. Max Baucus, the ranking Democrat on the committee.

But proposals for complete repeal face an uphill struggle in Congress because the AMT now generates huge amounts of revenue for the Treasury Department.

So what will Congress do?

For starters, one strong possibility is that Congress will approve a temporary patch later this year by preventing the basic AMT exemption from declining next year, as it's scheduled to do under current law. That's not much but would give Congress more time to tackle the issues.

Some financial advisers think the AMT problem is getting so big that the odds are improving for a fundamental cure. The AMT's rapid growth "will create a favorable environment for tax reform because millions of middle-income Americans will face substantial tax increases if the AMT isn't changed," says a recent report by Andy Laperriere of ISI Group, a New York research and brokerage firm.

Mr. Laperriere says near or full repeal of the AMT "is likely to be a high priority in a tax bill extending the Bush tax cuts and reforming the tax code that we expect to move through Congress in 2006 or 2007."

slimcustomer,
in your example, the cash out refinance is treated differently than a new home purchase. When I did my refinance with cash out, the turbo tax did not ask me whether the mortgage is new purchase or cash out interests. Why or how they differ?

slimcustomer said: Ok here is the biggest AMT loophole I know of. Buy a house with a mortgage and deduct the interest. Let's say you own a $500,000 house with a $150,000 mortgage that was used to purchase your home. The interest on that mortgage is deductible under the AMT. If you did a cash out refi and got a $400,000 mortgage, the mortgage interest on the additional $250,000 would not be tax deductible under the AMT. However, if you sold your home and bought a new $500,000 house, you could take a $400,000 mortgage out and that would be deductible. You could then invest the proceeds in Savings bonds or tax free bonds. Obviously you'd have to qualify for the larger mortgage and there are significant expenses involved in buying and selling houses, but if you're on the fence about buying a new house and expect to owe the AMT, this might make your decision a little easier. Tax laws do change, but if no action is taken by Congress and the President, the AMT deduction will go down significantly next year and many more people will be swept up by it. I'm preparing as if it won't change and plan to bunch my charitable deductions into next year and increase contributions to my wife's 401k(two other important ways to dodge the AMT)

Bump for end of the year tax planning.

It is a good idea to exercise ISOs in the beginning of the year so you take the least amount of risk with market and AMT.

We'll see what they do. On the one hand, some politicians can claim they gave Americans a tax break and if they let this continue they'll get their money back without having to raise taxes to the previous levels. Other politicians have been calling for a repeal of tax cuts since the tax cuts started. Both sides seem to have little motivation to get rid of AMT as it stands. It will be interesting to see which politicians actually want middle class americans to have long term tax reform.