Misc Deductions 2-percent Floor

It’s Fall: 10 Weeks of Alternative Minimum Tax Planning Ideas…Week 10

Tuesday, December 29th, 2009 | Print This Post | Email This Post

Year-End AMT Planning Wrap-Up – Part 2

The AMT items that were talked about in Part 1 of this wrap-up generally were the bigger ones that can, depending on a taxpayer’s situation, present immediate year-end Alternative Minimum Tax savings opportunities. But the other items that were discussed in this 10-week series also are important in making sure the least amount of AMT is paid. Here is a brief recap of these other items, with references to the amtblog.com articles in which each appeared.

Investments: Private Activity Bonds – an individual investing in tax-exempt municipal bonds can receive an unpleasant surprise when he discovers that AMT has to be paid on the interest income from a certain type of municipal bond. See the December 18th article posted on amtblog.com.

Miscellaneous Itemized Deductions – business or investment-related expenses may be deductible under the Regular Tax, but they are not for the AMT. Several planning ideas on how to minimize this impact are presented. See the November 14th article posted on amtblog.com.

Limitation on Itemized Deductions: AMT Adjustment – when a taxpayer is in the AMT, the limitations that apply to itemized deductions are calculated differently from the limitations that apply for the Regular Tax. See the November 25th article posted on amtblog.com.

State Income Tax Refunds: AMT Adjustment – because of the different AMT treatment of state and local tax deductions, any adjustment to these deductions – for example, a refund of overpaid state taxes which generally is treated as income when received – is itself then given different treatment for the AMT. See the November 29th article posted on amtblog.com.

Standard Deduction – a taxpayer is allowed no standard deduction in calculating the AMT. An interesting planning idea here could mean that an AMT taxpayer might be better off not claiming the standard deduction at all. For a discussion of this opportunity see the November 18th article posted on amtblog.com.

Personal Exemptions – similar to the standard deduction, a taxpayer is allowed no deduction for personal exemptions in calculating the AMT. Not a whole lot can be done here, but there always are at least a few planning ideas. See the November 22nd article posted on amtblog.com.

The AMT Exemption, also known as “the annual patch” – the AMT Exemption amount is set annually by Congress. This is a prescribed amount by which a taxpayer’s Alternative Minimum Taxable Income must exceed his Regular Tax taxable income before the AMT itself is triggered. If Congress were to fail to adjust this exemption amount, 24 million new taxpayers would be pulled into the AMT, in addition to the four-plus million already stuck there. See the December 21st article posted on amtblog.com. Also, pay careful attention to the news we will be seeing on this in the near future as we anxiously await Congress’ fix on this again for 2010.

Good luck with your AMT planning. Hopefully each of these articles provided a simplified explanation along with a few 2009 Alternative Minimum Tax savings ideas. Soon we’ll be working on 2010!

Posted in AMT Exemption, AMT Planning in General, Misc Deductions 2-percent Floor, Personal Exemptions, Private Activity Bonds, Standard Deduction | No Comments »

It’s Fall: 10 Weeks of Alternative Minimum Tax Planning Ideas…Week 3

Saturday, November 14th, 2009 | Print This Post | Email This Post

“Miscellaneous” Itemized Deductions

It may seem odd that a category of expenses labeled “job expenses and certain miscellaneous deductions” could affect nearly a third of all taxpayers caught in the AMT, but that just happens to be the case. This category includes, in addition to job-related expenses that are not reimbursed by your employer, such other things as tax return preparation fees, investment-related expenses like fees paid to an investment advisor, trust fees, safe-deposit box fees, and any other expenses that are incurred in connection with earning the income that is shown on the tax return.

When calculating the Regular Tax, these types of expenses are deductible, but only if they exceed a certain percentage limitation. The limitation is 2 percent of the taxpayer’s Adjusted Gross Income, or “AGI.” For example, if AGI is $100,000, the taxpayer is allowed a deduction if the total of job-related and miscellaneous expenses exceeds $2,000 – but then only for the amount in excess of the $2,000.

For taxpayers stuck in the Alternative Minimum Tax, however, no deduction is allowed for miscellaneous itemized deductions. This difference between the Regular Tax and the AMT is reported on IRS Form 6251 as one of the numerous adjustments that must be made in calculating taxable income.

A couple of key planning tips here:

First, as with all itemized deductions, miscellaneous expenses are eligible to be deducted only in the year paid, whether by cash or by writing out and mailing, or actually delivering, a check. If a credit card is used, the date the charge is put on the card is the important date, even though the credit card bill is not paid until later when the bill comes in.

Second, as we’ve been preaching all along with other items such as state and local taxes, the key AMT planning step is determining whether the taxpayer has enough control over paying the expense so that he could choose to make it a deduction either in the current year or in the next year.

For example, if a taxpayer filed his 2008 return on the final extended due date of October 15, 2009, he probably wouldn’t be receiving the bill from his CPA until about now, in November. In this case, if the taxpayer is in the AMT in 2009 but will not be in the AMT in 2010, it makes more sense to pay the bill in January, 2010. So long as the 2 percent threshold is exceeded in 2010, there will be a Federal income tax benefit that otherwise would not be available if the bill were paid in 2009. Depending on the individual’s tax bracket, this savings could be up to 35 percent of the amount of this deductible expense.

There is nothing secret about this tax reduction opportunity – just the same basic and easily executed tax planning strategies as discussed in our earlier articles. Estimating your tax situation this year and next – to see if you are in or out of the AMT – and then just paying the bill in the more advantageous year is all there is to it.

Posted in Misc Deductions 2-percent Floor | 2 Comments »