How Can I Avoid the AMT?
We'll walk you through the form, line by line.
By Kevin McCormally, Editorial Director, Kiplinger.com
December 2008
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One of the best things that can be said about the alternative minimum tax 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.
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 the amount shown on line 41 of your 1040, which 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 from line 38 of the 1040 because 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 effectively added back into your income here.
Also, in calculating the AMT you cannot take the deductions for personal exemptions. Because the amount on line 38 or 41 of the 1040 is used as the starting point for computing the AMT, the personal exemptions (which are claimed on line 43 of the 1040) are effectively added back into your income for AMT purposes. This is one of the reasons that married couples with children are strongly affected by the AMT. If you are a married couple with three children, you lose $17,500 ($3,500 x 5) in personal exemptions under the alternative minimum tax in 2008.
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: If your employer has a pre-tax medical deduction plan or cafeteria plan, sign up for it. You can reduce your salary to pay your medical expenses on a pre-tax basis, which will help you reduce 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 arable land on which you are paying real estate tax, you could turn it into a farm rental and deduct the taxes on Form 4835.
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Reader Comments (6)
Posted by: Patty Lou Stanley at 03/19/2009 01:57:41 PM
...is (there) a $400 bonus in new tax laws for taxpayers? I have looked up and down for this deduction. I can't find it.
Posted by: tony at 03/31/2009 05:27:44 PM
The $400 your thinking about is the new "Making Work Pay Credit" You will receive it either throughout the year in the form of reduced withholding on your paycheck or as a credit on your 2009 Income tax Return that will be filed in 2010. It has no effect for thsi tax year.
Posted by: Kathy L Spencer at 09/17/2009 05:05:26 PM
Does Warren Buffet pay AMT? If so, how can he say his tax rate is 17.7%?
Posted by: PatShelby at 10/07/2009 01:57:00 PM
I dont usually reply to posts but I will in this case, great info...
Posted by: Joe at 02/21/2010 04:04:39 PM
Tony... The Making Work Pay Credit IS for 2009 and I believe 2010 as well. The $400 credit is to kind of actually "make up" for your withholdings which were slightly reduced sometime last spring and throughout the rest of the year. Some employers would have started withholding less sooner than others. This was part of the stimulus package. The idea was to get money in peoples hands sooner rather that the 600.00 checks that have been done in the past. In NO WAY is it an either less withholding or get the credit. From Publication 17 page 262 "You may be able to take this credit if you have earned income from work. Even if your federal income tax witholding was reduced during 2009 because of the credit, you MUST complete Schedule M and claim the credit on your return TO BENEFIT FROM IT. The credit is 6.2% of your earned income but cannot be more than $400 or $800 if MFJ. Basically if you made more than about 7000 you get it. There are of course phase outs if you make for than 95000 single or 190000 Joint.
Posted by: Geoff at 07/27/2010 12:40:31 PM
You spread this article over five pages? Why so few? If you ramped that up to 20 pages, one page per tip, you could QUADRUPLE YOUR AD VIEWS! How am I supposed to take money advice from a magazine that doesn't know how to maximize its own revenue?!