# 1 – Personal exemptions

For the Regular Tax, every taxpayer is entitled to a personal exemption deduction for himself, and his spouse and/or other dependents.  Since the AMT denies any deduction for personal exemptions, this is the single item affecting almost every individual paying the Alternative Minimum Tax.

# 2 – State and local tax deduction

This item, which consists of property taxes, state and local income taxes, and sales taxes, is only slightly behind personal exemptions in terms of the number of AMT payers affected.  The reasons for this are the relatively heavy burden of state and local taxes as well as the fact that the AMT disallows every dollar of this deduction.

# 3 -Capital gains

This is not specifically listed as an AMT item, but the impact of capital gains on an individual’s Alternative Minimum Tax can be significant.  At levels of taxable income where most AMT payers find themselves, an additional $100 of capital gains could add up to $7 of AMT being paid on top of the $15 imposed by the Regular Tax capital gains bracket.

# 4 – Miscellaneous Itemized Deductions

A taxpayer’s employee business or investment-related expenses may be deductible under the Regular Tax, but they are not for the AMT.  This affects nearly a third of all AMT payers.

# 5 – Depreciation

Business owners and investors with rental property are allowed depreciation deductions for the property used in these activities.  The AMT disallows a portion of the depreciation deduction that otherwise may be taken.

# 6 – Passive activity losses

Many investment activities are considered “passive” for tax purposes.  An example is a taxpayer who acquires an interest in an investment partnership.  As such, losses from these investments are limited in how they may be deducted for purposes of the Regular Tax.  The AMT imposes even further limitations on the use of these losses.

# 7 – Private activity bond interest

An individual investing in tax-exempt municipal bonds may receive an unpleasant surprise when he discovers that Alternative Minimum Tax has to be paid on the interest income from a certain type of municipal bond – the so-called private activity bond.  While there may be an increase in before-tax yield from this type of bond, the after-AMT results can be very disappointing.

# 8 – Standard deduction

A taxpayer is allowed no standard deduction in computing the AMT. A valuable planning idea here could mean that an AMT taxpayer might be better off not claiming the standard deduction at all.

# 9 – Medical and dental expenses

For purposes of the Regular Tax, individuals are allowed a deduction for medical and dental expenses, to the extent these expenses exceed 7.5% of Adjusted Gross Income.  The AMT limits this deduction even further by instead imposing an excess-of-10% requirement.

#10 – Limitations on investment losses

In addition to the limitation on the use of passive activity losses as discussed above, there are other investment activities, not falling under the passive rules, the losses from which still will be limited for purposes of the Regular Tax.  Again, the AMT places even further limitations on the use of these losses.

Conclusion

In addition to this top ten list, there are nearly 20 other individual items waiting to trip up the AMT payer.  The individual items that catch any particular taxpayer are shown on that individual’s Form 6251 that is attached to his tax return.  It is important to note, however, that planning opportunities exist that can lessen the impact of each and every one of these.  Check these out at AMTIndividual.com.

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!

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.