Although I grumble a lot about the AMT tax, I know of one benefit, although small, to paying it. For me, the 2005 state tax refund I received in 2006 will not be considered taxable income when I file my 2006 return. This is because the reduction in state income tax would not have reduced the AMT tax I paid for 2005. Hence, the tax refund is not considered taxable income in 2006:-)
As background, the AMT (Alternative Minimum Tax) was created to ensure that "wealthy" taxpayers pay a minimum tax. The AMT does this by excluding certain tax preference items when calculating the AMT tax. The following are some of the tax preference items that affect many tax payers: exemptions, medical deductions, state and local income taxes, property taxes, certain tax exempt interest, miscellaneous itemized deductions, various credits, and long-term capital gains. The tax was intended to only affect "wealthy" taxpayers. However, since it was not indexed to inflation, each year more middle class tax payers are affected.
For more details on the AMT tax see the Guide to Alternative Minimum Tax (AMT) from Fairmark.
I first had to pay the AMT tax on my 2004 tax return. Previously, I had accelerated paying my property taxes in order to take the tax deduction earlier. However, due to the AMT tax, accelerating payment of the property taxes did not reduce my taxes. In fact, the only deductions that aren't affected by AMT are home mortgage interest and charitable deductions. Read about the experiences of another tax payer at Finance Buff who posted Tax Deduction Denied.
And now back to the 2005 state tax refund ....
Since returning from an overseas assignment and having our first child, I haven't been able to estimate our taxes correctly, resulting in an overpayment of state taxes for 2005 and a significant state tax refund in 2006. However, since a lower payment of state taxes (equal to the 2005 payment minus the refund) still would have triggered the AMT tax, my 2005 tax refund is not taxable income. Bonus!
The official method to check whether a refund is taxable or not is to recalculate the previous tax return with the itemized state taxes reduced by the refund amount. If there is no change in the AMT tax, then no tax is owed on the refund.
So this year, while I am grumbling again about triggering the AMT tax, the silver lining will be that my 2005 state tax refund is not considered taxable income for 2006.
For more on Ideas You Can Use , check back every Tuesday for a new segment.
Photo Credit: morgueFile.com, Clara Natoli
As background, the AMT (Alternative Minimum Tax) was created to ensure that "wealthy" taxpayers pay a minimum tax. The AMT does this by excluding certain tax preference items when calculating the AMT tax. The following are some of the tax preference items that affect many tax payers: exemptions, medical deductions, state and local income taxes, property taxes, certain tax exempt interest, miscellaneous itemized deductions, various credits, and long-term capital gains. The tax was intended to only affect "wealthy" taxpayers. However, since it was not indexed to inflation, each year more middle class tax payers are affected.
For more details on the AMT tax see the Guide to Alternative Minimum Tax (AMT) from Fairmark.
I first had to pay the AMT tax on my 2004 tax return. Previously, I had accelerated paying my property taxes in order to take the tax deduction earlier. However, due to the AMT tax, accelerating payment of the property taxes did not reduce my taxes. In fact, the only deductions that aren't affected by AMT are home mortgage interest and charitable deductions. Read about the experiences of another tax payer at Finance Buff who posted Tax Deduction Denied.
And now back to the 2005 state tax refund ....
Since returning from an overseas assignment and having our first child, I haven't been able to estimate our taxes correctly, resulting in an overpayment of state taxes for 2005 and a significant state tax refund in 2006. However, since a lower payment of state taxes (equal to the 2005 payment minus the refund) still would have triggered the AMT tax, my 2005 tax refund is not taxable income. Bonus!
The official method to check whether a refund is taxable or not is to recalculate the previous tax return with the itemized state taxes reduced by the refund amount. If there is no change in the AMT tax, then no tax is owed on the refund.
So this year, while I am grumbling again about triggering the AMT tax, the silver lining will be that my 2005 state tax refund is not considered taxable income for 2006.
For more on Ideas You Can Use , check back every Tuesday for a new segment.
Photo Credit: morgueFile.com, Clara Natoli
This is not financial or tax advice. Please consult a professional advisor.
Copyright © 2007 Achievement Catalyst, LLC
Subscribe to My Wealth Builder
No comments:
Post a Comment