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Tax Breaks

Can You Dodge the AMT Bullet?

You're not doing yourself a favor if you fail to take deductions you deserve just to avoid the alternative minimum tax.

Editor's note: This is the transcript of Kiplinger Editorial Director Kevin McCormally's commentary on the March 26 broadcast of Nightly Business Report.

I got a question the other day from a Nightly Business Report viewer wondering if she'd come up with a clever way around the alternative minimum tax. She knew that one of the things that can trigger the AMT is a fat state income-tax deduction. Could she simply not claim all of her state income tax, if that would save her from being tossed into the notorious netherworld of the alternative minimum tax?

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Believe it or not, the IRS recently took a taxpayer to court for trying to do just that -- avoid the AMT by not claiming all of her legitimate tax breaks. And, the IRS won. A federal court said the alternative minimum tax is figured the same way whether or not a taxpayer takes advantage of all of her deductions on her regular tax return.

But here's the most interesting thing about that case: Imposing the AMT did not add one dime to what the taxpayer owed the IRS. And that brings us to a critical issue for the viewer who asked the question ... and for all of you.

Remember this: You only pay the AMT when it's more than your regular income tax liability.

So, if you avoid the AMT by increasing your regular tax bill -- by skipping itemized deductions or exemptions for your kids, for example -- you're not doing yourself any favor. In fact, you're shooting yourself in the foot. The IRS is still going to collect the same amount ... or maybe more.

Now, in cases involving certain tax credits that are allowed under the regular rules but wiped out by the AMT, skipping a regular tax break to avoid the AMT might save some money. But don't think you can come out ahead by forfeiting itemized deductions.

See Kevin's previous tip.

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