Tax Tips
Beware the AMT
Should you accelerate deductions to cut taxes? It depends -- you could end up with a bigger tax bill.
By Mary Beth Franklin, Senior Editor, Kiplinger's Personal Finance
December 6, 2006
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If you pay quarterly estimated state income taxes or have a real-estate tax bill due in January, you can pre-pay it this month and boost your deductions on your 2006 federal tax return. But beware. If you're among the growing number of taxpayers ensnared by the alternative minimum tax, this sooner-than-later strategy won't work for you.
The AMT is a parallel tax system with its own set of rules. Originally designed to make sure wealthy people could not use legal deductions and loopholes to drive their tax bill to zero, the AMT is now increasingly affecting the middle class. The AMT does not allow deductions for state and local taxes, home-equity loan interest (unless the borrowed money was used for home improvements), or items such as investment expenses. Nor does it allow personal exemptions -- worth $3,300 this year -- for yourself, your spouse and each of your dependent children.
Essentially, you have to figure your taxes under two sets of rules -- the regular tax code and the AMT -- and pay whichever is higher. Regular tax brackets are indexed for inflation but the AMT isn't. Consequently, your chance of being trapped by the AMT increases each year, particularly if you claimed large deductions for state income taxes or property taxes or have a large family.
Although Congress approved a one-year patch that will prevent about 15 million new taxpayers from being hit by the AMT this year, if you paid it last year, you'll probably be caught again this year.