KIPLINGER TAX CENTER
TRUSTED ADVICE TO HELP YOU LOWER YOUR TAX BILL
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One of the best things that can be said about the AMT is that Congress was successful in making it difficult to get around this tax. To avoid the AMT, you need to understand how the AMT differs from the regular tax system.
If You Have Last Year's Form 6251 . . . | |||
Find Your AMT Threats FastThe simplest way to see why you are paying the AMT, or how close you came to paying it, is to look at your Form 6251 from last year. • Compare the Tentative Minimum Tax to your regular tax (Tentative Minimum Tax should be the line above your regular tax) to see how close you were to paying the AMT. • Look for positive entries on lines 1 through 26, which indicate increases to your taxable income for the purposes of the AMT. For instance, you have to put various items back into your income, adding such items as your standard deduction, personal exemptions, home equity mortgage interest, miscellaneous deductions such as employee business expenses, and incentive stock options. | |||
We'll walk through Form 6251, line by line, looking at the way the AMT handles different deductions and expenses, and wherever we see a tax-planning opportunity, we will suggest how to lessen the impact of the AMT.
Line 1, Standard Deduction: If you itemize, this line is your Adjusted Gross Income (AGI) minus your itemized deductions (some of which are added back in on the following lines). If, on the other hand, you take the standard deduction instead, this line is solely your AGI; you can't take any part of the standard deduction when calculating the AMT. So, if you took the standard deduction on your regular return, it is added back into your income here.
Line 2, Medical Expenses: If you itemize deductions, medical deductions are only allowed to the extent that they exceed 10 percent of adjusted gross income, rather than 7.5 percent under the regular tax system.
Suggestion: See if your employer has a pretax medical deduction plan or cafeteria plan. If you pay medical expenses on a pretax basis, they are no longer included in taxable wages or deductible as itemized deductions. This will help with both the AMT and your regular tax.
Line 3, Taxes: In calculating the AMT, you cannot take itemized deductions for state and local income tax, real estate taxes, and personal property taxes, even though these are deductible on your regular return.
Suggestion 1: In a year that you have to pay the AMT, don't bother prepaying real estate or fourth-quarter state estimated tax payments in December. You get no benefit from paying these taxes in a year that you are subject to the AMT.
Suggestion 2: Real estate tax and personal property taxes are not deductible for AMT if they are part of itemized deductions. Taxes deductible on a business schedule (Schedule C), rental schedule (Schedule E), or farm schedule (Schedule F or Form 4835) are allowed for the AMT.
• Perhaps you can qualify for a home office, which would allow you to deduct part of your home real estate tax on Schedule C.
• If you have a farm operation and use your car in your work, you could deduct the personal property tax on the car on Schedule F.
• If you have vacant land on which you are paying real estate tax, you could turn it into a farm rental and deduct the taxes on Form 4835.
Line 4, Home Equity Interest: Home mortgage interest claimed as an itemized deduction is only deductible for the AMT if the loan was used to buy, build or improve your home. For regular tax purposes, interest on home equity mortgages up to $100,000 is deductible, even if the proceeds are used for personal purposes, such as buying a car or paying off credit card debt.
Suggestion: If you are subject to the AMT, there is no advantage to using your home equity line of credit to buy a car, because the interest will not be deductible. You may be able to get a lower interest rate from a regular car loan. If the car is used in your business, you may be able to write off some of your auto loan interest as a business expense on Schedule C.
Line 5, Miscellaneous Itemized Deductions: Miscellaneous itemized deductions are not deductible for AMT purposes. Often generated by employee business expenses, these itemized deductions can save you a lot of money on your regular return. If so, when the AMT puts them back into your taxable income, you could face a big problem.
Suggestion 1: Employee business expenses (Form 2106) are incurred by employees, not self-employed individuals. These work-related expenses were not reimbursed in full by the employer. These expenses become miscellaneous deductions on Schedule A, Itemized Deductions, and can only be deducted to the extent that all miscellaneous deductions exceed 2% of your adjusted gross income. Only the excess amount can be deducted. If you are in this situation, ask your employer to start reimbursing you for your business expenses.
If your employer has a non-accountable business expense plan, encourage him or her to adopt an accountable plan. In a non-accountable plan, your employer gives you an expense advance check, and you are not required to keep records of your purchases. The advance is included in your income, and you take your expenses as miscellaneous itemized deductions.
In the AMT system, you are taxed on the expense advance, but can't take a deduction for the expenses.
To avoid this situation, encourage your employer to change to an accountable plan. With this plan, you turn in your receipts to your employer and you must refund any expense advance not used. Because you are not taxed on the advance and you do not take a deduction for the expenses, you avoid being hit by AMT rules.
Suggestion 2: If you have employee business expenses that your employer refuses to reimburse, and you know that these expenses are causing you to pay the AMT, consider negotiating with your employer. You may be better off by having the employer pay some of these expenses in exchange for a lower salary. Your employer will save on payroll taxes, workman's compensation insurance, and in some cases liability insurance premiums, and you will reduce your taxable income and possibly avoid the AMT altogether.
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