Tuesday, February 27, 2007

When AMT Tax Is Triggered - Stop and Delay Deductions

After my first year of triggering the Alternative Minimum Tax (AMT), I realized that I would need to change my strategy for taking itemized deductions. Until that time, I had usually accelerated tax deductible payments such as property taxes into the earlier tax year. That way I could take a higher itemized deduction and get the tax benefit a year earlier. However, once I triggered the AMT tax, the strategy changed to delaying most deductions until the next tax year. The reason is that once the AMT tax is activated, additional deductions have ZERO impact on one's tax liability.

Briefly, here's how the ATM tax works. It basically allows for only two deductions, charitable contributions and mortgage interest. Other deductions are added back to one's income. For most people, this includes the standard or itemized deductions and exemptions. If one itemizes the following categories will not be used to reduce adjusted gross income when calculating one's AMT tax: medical expenses, local taxes, property taxes, second home mortgage and miscellaneous deductions.

The AMT calculates a minimum tax that is to be paid, irrelevant of the itemized deductions described above. So additional deductions will not reduce one's taxes and delaying the deduction to the following year may allow the deduction to count.

For more on Ideas You Can Use, check back every Tuesday for a new segment.

Photo Credit: morgueFile.com, Alex

This is not financial advice. Please consult a professional advisor.

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