State Income & Other Taxes

Fall AMT Planning Series – State Income Taxes

Sunday, October 3rd, 2010 | Print This Post | Email This Post

For Regular Tax purposes you are allowed a deduction for all state income taxes that you pay. If you are stuck in the Alternative Minimum Tax, however, you are allowed no deduction for state income taxes. This problem affects almost 100 percent of all individuals paying the Alternative Minimum Tax, so it is something that you definitely need to look into. This also represents one of the easiest AMT planning opportunities that you can do something about.

Overview

Every state that has an income tax requires that you pay your tax throughout the year. This can be done either through withholding from your paycheck if you are an employee, or through quarterly estimated payments if you are self-employed, retired, or have not adjusted your withholding to cover the additional taxes you will owe on your investment income.

Two key rules that apply to all states

1 – No state requires you to pay in 100% of your state tax liability – the required percentage generally is 80% or 90%. If you don’t pay in this required amount you may be subject to an underpayment penalty, which usually is calculated in a manner similar to interest.

2 – If you make quarterly estimated tax payments, the fourth quarter payment is generally due on January 15 – for example, January 15, 2011 for the fourth quarter installment of your 2010 taxes. This is the way the IRS works, and most states follow this pattern.

How to do this simple tax planning

The AMT-saving strategy here is to focus on the control you have over the payment of this last 10 or 20 percent you will owe, or, if applicable, your fourth quarter installment. Since you have the choice of paying this portion of your state income taxes in December or in January, the simple act of when you write out the check will have a direct impact on the AMT you will pay. As mentioned above, you get no benefit from a state income tax deduction in a year you are in the AMT. By putting more of your state income taxes paid in a year you are not in the Alternative Minimum Tax, you will achieve real tax savings.

Example

Assume that you are in the AMT in 2010, your total 2010 state taxes are $15,000, you will not be in the AMT in 2011, and your Regular Tax bracket is 35%. If you could defer paying $1,500 of your 2010 state income tax until January, this would save you over $500. If you could defer $3,000, your savings would be over $1,000. Note that even if you end in the AMT again next year, continuing to execute this strategy will mean that you will achieve this Regular Tax benefit in the first year that you are not in the AMT.

If you are certain that you will not be in the AMT next year, consideration might be given to delaying payment of more than the allowable percentage, even if it means incurring an underpayment penalty. The underpayment penalty for many states is at an interest rate of around 6% – incurring this small penalty obviously still will result in a lot more tax-savings cash in your pocket when you think about the Federal tax savings of up to 35%.

What you’ll need

If you do decide to pursue a state income tax strategy, first you will need to check the rules for making estimated payments for the state in which you live. All states have the necessary forms and related instructions that you will need available on their web sites.

The three key forms are each state’s equivalent of the following IRS forms:

Form W-4, Employee’s Withholding Allowance Certificate – This can be filed at any time with your employer to adjust your withholding up or down.

Form 1040-ES, Estimated Tax for Individuals – This is used to make quarterly estimated tax payments if you are self-employed or retired, or if you have not adjusted your withholding for the additional taxes due on your investment income.

Form 2210, Underpayment of Estimated Tax by Individuals – This is used to determine whether you have paid in the required percentage. By reading the instructions you will see what your state’s required minimum pay-in percentage is.

Conclusion

Look at the potential cash benefit to you, as seen in the example above, from making this small investment of your time. You the individual taxpayer can do this without the need to spend money on expensive professional advisers. One very easy way to tackle this is to log on to AMTIndividual.com, where all of the explanations, links to the forms for your own state, and an easy-to-use online dual tax calculator/planner are available to help you make a significant reduction in your Alternative Minimum Tax!

Posted in State Income & Other Taxes | No Comments »

Real Estate and the AMT: Home Ownership

Tuesday, September 21st, 2010 | Print This Post | Email This Post

The Alternative Minimum Tax is a very important consideration for taxpayers who own real estate because just about every tax rule applying to real estate is different for the AMT than it is for the Regular Tax. This second part of our four-part series on Real Estate and the AMT will address the most common form of real estate ownership – the taxpayer’s personal residence. Typically this is a taxpayer’s largest purchase, and the differences in tax treatment between the Regular Tax and the AMT can be significant.

Following the order of the issues described in our previous overview article, here is a look at how they apply to a personal residence:

Interest expense

Interest paid on a loan secured by a taxpayer’s home, referred to in the tax law as “qualified residence interest,” is deductible for purposes of the Regular Tax, subject to a few limitations. Interest on home acquisition debt is deductible in full to the extent the mortgage does not exceed $1 million, as is interest on home equity debt to the extent the debt does not exceed $100,000. Home equity debt, typically a second mortgage or a home equity line of credit, can be used for any purpose – a car loan or a child’s education are examples.

Under the AMT, a taxpayer is allow a full deduction for home acquisition debt. For home equity debt, however, it is AMT-deductible only if it is used to improve the residence, i.e., if it used for other purposes, such as the car loan or student loan mentioned above, it is not deductible for the AMT.

Planning idea – look to alternative means of financing instead of home equity debt when financing automobile purchases, college tuition, or other personal purposes. A special-offer automobile loan at 1.9%, for example, certainly would be less expensive financing than a home equity loan for an AMT payer.

Property taxes

Property taxes are allowed in full for Regular Tax purposes, but, along with all other state and local taxes, are not allowed at all as a deduction for the Alternative Minimum Tax.

Planning idea – if you have an opportunity to pay your property tax bill either this year or next, pay it in a year that you are not in the AMT. Depending on levels of income, itemized deductions and other factors, taxpayers may find themselves in the AMT one year but not the next.

Example – in Florida, property tax bills are mailed in October, and are payable under the following discount schedule: November – 4%, December – 3%, January – 2%, February – 1%. If you are in the AMT in 2010 but expect not to be in the AMT again in 2011, do not pay your bill in November or December - forgoing that small discount could save a taxpayer up to 39.6% of the amount of the property taxes on his Federal income tax bill next year.

Depreciation

Depreciation does not apply to a personal residence, except perhaps for a taxpayer claiming a portion of his residence as a “home office” or other business use. This topic will be discussed in some detail under the topics of rental/investment property and business property in the next two articles in this series.

Active/passive investment rules and the “at-risk” rules

Similar to Depreciation, these rules will be discussed in the next articles in this series; they do not apply to property held as a personal residence.

Sale of the property

A sale of a personal residence is not taxable to the extent the gain does not exceed $500,000, for a married couple filing jointly, or $250,000 for a single taxpayer. Any gains over these amounts are taxable, as long-term capital gains. Capital gains in and of themselves are not an AMT item, but they nonetheless can result in AMT being paid. This is because the AMT exemption amount is phased out for taxpayers at certain income levels, so this additional income can have the result of reducing the exemption which, in turn, increases taxable income for purposes of the Alternative Minimum Tax.

This issue is discussed in some detail in an article posted on amtblog.com on December 13, 2009. This article also can be found by doing an internet search for “alternative minimum tax planning – investments – capital gains.”

Next in this series on Real Estate and the AMT – property owned as rental/investment property.

Posted in AMT Planning in General, Capital gains & Dividends, Depreciation & Disposition of Property, Home Mortgage Interest, State Income & Other Taxes | No Comments »

It’s September: Time to Start our Fall AMT Planning Series

Saturday, September 18th, 2010 | Print This Post | Email This Post

“It’s the time of the season” was the way we introduced this Fall planning series a year ago. Swimming pools are closed, the kids are back in school, and the foliage may be starting to turn. Only a few of you stragglers are on final extension to October 15 for your 2009 returns. It’s time to start thinking about 2010!

Do you have an idea yet whether you’ll owe more taxes in April or be getting a refund? Do you remember that you do have the opportunity – now – to make your April refund bigger or the check you write the IRS smaller? All it takes is a brief look at your tax situation today, and knowing a little about what you can do between now and year-end. If you wait until January it’s too late to do much about lowering your 2010 taxes.

This is especially true for those of you who are stuck in the Alternative Minimum Tax, and once again will be filling out the Form 6251. For AMT payers, there is a long list of ways to reduce your AMT bill, and all of them are simple and easy to do.

Over the next several months we’ll be doing a series of articles on what these planning ideas are, and we’ll drill down in some detail so you can understand the AMT issue itself and the resulting planning opportunities.

Here is a sample of what we’ll be talking about:

Property taxes – many of you already have received your property tax bill. Assuming you have a choice of paying it in December or in January, the simple act of when you write out the check can have a direct impact on the AMT you’ll pay.

State income taxes – similar to property taxes, your state income taxes have an impact on your AMT. The more state taxes you pay this year the higher your AMT bill will be – another opportunity to have an immediate impact on the tax you’ll pay.

Example – assume you owe $5,000, either in property taxes or in additional 2010 state income taxes. If you are in the AMT this year and pay these taxes in 2010, you will get zero tax benefit. If you wait until January to pay the $5,000, and then if you are not in the AMT in 2011, you will achieve a tax savings from the IRS of up to nearly $2,000.

There are many other ideas – simple ones like this – that we’ll be writing about between now and year-end, and we’ll be explaining each one in plain English so you can understand them and act on them. Don’t wait any longer – “it’s the time of the season.”

Posted in AMT Planning in General, State Income & Other Taxes | No Comments »

Real Estate and the AMT: Overview

Tuesday, September 14th, 2010 | Print This Post | Email This Post

The Alternative Minimum Tax is a very important consideration for taxpayers who own real estate, because many of the rules that apply to real estate are different for the AMT than they are for the Regular Tax. This article is the first of a four-part series on Real Estate and the AMT. We’ll start with an overview of the differences in the rules, and then will drill down into the details in the three different situations taxpayers find themselves when they own real estate: 1) the taxpayer’s residence; 2) a rental/investment property; or 3) property used in the taxpayer’s trade or business. These articles will be updated periodically to reflect future changes in the tax law that affect the Regular Tax and AMT treatment of real estate.

Here are the things we will be looking at:

Interest expense

Except for anyone who travels in the Buffet/Gates social circles, every purchase of real estate will be financed. Financing, in turn, means that interest will be paid. In general, the tax law allows a deduction for this interest for Regular Tax purposes, although a number of different limitations can apply. These limitations vary, depending on whether the property is a residence, or is rental/investment or business property. The separate AMT limitations that apply to real estate also vary among these categories.

Property taxes

Property ownership brings with it the obligation to pay property taxes. In general, for Regular Tax purposes real estate taxes are deductible regardless of the reason for holding the property. This is not the case for Alternative Minimum Tax payers, however, for whom the deduction may be totally disallowed in some situations, yet allowed in others, depending on which of the three classifications applies.

Depreciation

Depreciation is a deduction that allows a taxpayer to recover the cost of an investment in property, depending again on the taxpayer’s purpose for holding the property. If depreciation deductions are allowable, the AMT has a set of rules different from the ones that apply for purposes of the Regular Tax.

Active/passive investment rules and the “at-risk” rules

In some cases the tax law’s active vs. passive investment rules, and/or the at-risk rules, will apply to individuals owning real estate. These are overarching rules that supersede the other individual tax law limitations. Even if they do apply, however, an AMT payer still must keep track of the separate AMT calculations required by the other limitations.

Sale of the property

Very few taxpayers hold on to property for life; at some point in the future it can be expected that the property will be sold. A number of special Regular Tax rules apply to the sale of real estate, and, in most cases, an AMT payer will have a different set of calculations to make.

Conclusion

Real estate is one of the biggest purchases most taxpayers make, and it is likely there will be a number of real estate purchases and sales throughout the taxpayer’s lifetime. The Regular Tax rules are complicated enough, but additional wrinkles exist in the calculations for Alternative Minimum Tax payers. With a little knowledge, however, these complications and wrinkles can present some real tax planning opportunities for AMT payers.

The next article in this series will address the specific tax issues for real estate owned as a personal residence – certainly the most common form of property ownership.

Posted in AMT Planning in General, Capital gains & Dividends, Depreciation & Disposition of Property, Home Mortgage Interest, State Income & Other Taxes | No Comments »

AMT Case Study: Vice President Biden’s 2009 Tax Return

Monday, May 31st, 2010 | Print This Post | Email This Post

As has become customary, the President and the Vice President have released their recently-filed tax returns. You can find these tax returns on the White House blog by doing a search for “tax returns,” or by clicking on this link: http://www.whitehouse.gov/blog/2010/04/15/president-obama-and-vice-president-biden-s-tax-returns.

An interesting thing to note is that Vice President Biden remains stuck in the Alternative Minimum Tax, as he has been for at least the past several years. As we have been discussing in recent articles, the combination of the AMT exemption phaseout along with his itemized deductions is what ensnares him in the AMT trap. The VP’s total income was just over $300 thousand, certainly not in the “rich” category by today’s standards for a couple with two incomes. President Obama, with income in excess of $5 million, didn’t even come close to paying the AMT.

Let’s review what we have been talking about in the last few articles, using the Vice President’s return as a case study. The reader is encouraged to look at the Bidens’return as we go through this analysis.

AMT exemption phaseout

The VP’s Alternative Minimum Taxable Income (“AMTI”) was $298,013, right in the middle of the AMT exemption phaseout range of $150,000 to $433,800 (see the May 8th article on the AMT exemption). So instead of getting his full AMT exemption of $70,950, he was limited to an exemption of $33,947. Was he starting to hear the AMT sucking sound at this point? You bet he was.

Itemized deductions – state income tax

The Vice President’s state of residence is Delaware, one of the majority of states that has an income tax. As can be seen in his tax return, he made a total of $17,718 in state tax payments in 2009 through a combination of withholdings from his and his wife’s wages as well as prior year estimated payments. This amount properly was deducted for Regular Tax purposes, as can be seen on his Schedule A – Itemized Deductions.

As it turned out, however, Biden was significantly overpaid – more than was required to meet his obligation to the state of Delaware. The overpayment of $4,749 is seen on his Delaware state tax return also shown on the White House web site along with the Federal return.

AMT impact from state income tax overpayment

The $4,749 overpayment by itself resulted in $1,567 in AMT. Since this means zero in Federal tax benefit because the AMT allows no deduction for taxes, this was a wasted deduction. Had the VP done some basic AMT planning, he would have been better off paying this in 2010 as part of his 2010 Delaware taxes.

Also, as was discussed in the May 17th article on state income taxes and the AMT, Delaware tax law only requires that 90% of an individual’s income tax needs to be paid in by December 31 in order to avoid a penalty. Adding this 10% to the actual overpayment means that he paid another $470 in 2009 Alternative Minimum Tax that did not have to be paid.

Note also that the Vice President’s overpayment of Delaware taxes will be an AMT item – this time in his favor – on next year’s 2010 return. Such refunds are income for Regular Tax purposes but are not for the AMT because of the absence of an AMT benefit having been received in the prior year.

Itemized deductions – property taxes

We cannot tell from the VP’s income tax return when he received his property tax bill or when it was paid, but this is another area of potential AMT savings. As explained in the May 21st article on property tax planning, a taxpayer’s possible control over paying a property tax bill in December or in January is a factor with direct impact on the amount of Alternative Minimum Tax paid. Refer to that article for a specific example of how this works.

AMT planning

Will the Vice President ever be able to get completely out of the Alternative Minimum Tax? While we don’t have the information to know the answer to that question, there certainly are enough opportunities, as discussed above, for him easily to at least reduce the amount of AMT that he is paying.

Conclusion

Even though this Memorial Day weekend officially opens barbecue season, and we now have other summertime distractions like golf, tennis, or just taking some time off for a well-earned vacation, it soon may be too late to adjust state tax withholdings and to make other needed changes if you don’t start giving your 2010 AMT situation a little early thought.

Posted in Calculation of the AMT, State Income & Other Taxes | 1 Comment »

Calculation of the Alternative Minimum Tax – Property Taxes

Friday, May 21st, 2010 | Print This Post | Email This Post

Similar to state income taxes, for Regular Tax purposes you are allowed a deduction for property taxes that you pay. Under the AMT, however, you are allowed no deduction for property taxes. This problem affects more than 90 percent of all folks stuck in the Alternative Minimum Tax, so it is something that you definitely need to look at.

Property tax assessment and billing cycles vary among the states, but the basic concept of your control over paying a tax bill in December or in January – as we previously discussed regarding state income taxes – also applies to property taxes.

Real estate taxes

As an example, here is a sample of an actual property tax bill on a $500,000 residence in a state that assesses the tax in the fall, and then gives the taxpayer a choice of payment dates in accordance with a set schedule. With this example we can see how easy it is to have a direct impact on the AMT you pay.

Assessed value		$500,000
Total property tax rate		1.0724%
Property tax due		$5,362
Due date		12/31/10

Payment schedule as shown on the actual bill:

If paid by	10/31/10	the amount due is	$5,255	(2% discount)
“	12/31/10	“	5,362	(no discount)
“	1/31/11	“	5,630	(5% penalty)
Paid after	1/31/11	“	6,488	(21% penalty)

The AMT-saving strategy for property taxes is extremely simple here, since you have a choice of paying your property taxes in 2010 or in January, 2011. The simple act of when you write out the check will have a direct impact on the AMT you will pay. As mentioned above, you get no benefit from a property tax deduction in a year you are in the AMT. By paying your property taxes paid in a year you are not in the AMT, you will achieve real tax savings.

In this example, if you are in the AMT this year but do not expect to be in the AMT in 2011, by waiting until January to pay this bill you will save up to 35% in Federal income taxes (39.6% if the “Bush tax cuts” are allowed to expire). This obviously is much greater than the 2% discount you will forego and the 5% penalty you will incur.

Each individual reader’s state assessment and billing cycle will vary from this example, but the concept is the same – to the extent you can, without incurring penalties with which you would not be comfortable, control even a portion of the timing of payment of your property taxes, you can save on your AMT bill.

Personal property taxes

Many states impose taxes on the value of personal property that is owned. Common examples are automobiles, boats, RVs and the like. Similar to real estate taxes, personal property taxes are deductible for the Regular Tax but not for the Alternative Minimum Tax, so here is one more planning opportunity.

Assume your personal property tax rate is 1.5%, for example, and you have a $40,000 car. Your tax will be $600. If you have the opportunity to pay this in one year versus another (the December – January example above), this could be an easy way to shave a few hundred dollars off your AMT bill.

Conclusion

Property taxes represent one of the easiest AMT planning opportunities. It is not hard to take a quick look at last year’s property tax bills to see when they were received and when they are payable. A little advance planning right now potentially can save thousands in taxes if the AMT is taken into consideration when paying these bills.

Posted in Calculation of the AMT, State Income & Other Taxes | No Comments »

Calculation of the AMT – State and Local Income Taxes

Monday, May 17th, 2010 | Print This Post | Email This Post

Every state with an income tax requires that you pay the tax throughout the year, just as the IRS does. This is done either through withholding from your paycheck – if you are an employee – or through quarterly estimated payments if you are self-employed, retired, or you are an employee but have not increased your withholding to cover the taxes you will owe on your investment income.

If you are stuck in the AMT, you are getting no benefit from your state income taxes paid – they simply are disallowed as a deduction in computing the Alternative Minimum Tax. But if you could move some of your deductions to a year when you are not in the AMT, you could achieve real tax savings – up to the 35% depending on your tax bracket.

Essentials of state tax payments

There are two essential things to remember in planning your state income tax payments in order to reduce your AMT

One is that no state requires you to pay in 100% of your state tax liability – the required percentage generally is 80% or 90%. If you don’t pay in this minimum required amount you may be subject to an underpayment penalty, which usually is calculated in a manner similar to interest.

Second is that if you make quarterly estimated tax payments, the fourth quarter payment generally is due on January 15 – for example, January 15, 2011 for the fourth quarter installment of your 2010 taxes. This is the way the IRS works, and most states follow this pattern.

Control over that last portion of state taxes due

Remembering the above key facts, the AMT-saving strategy is to look at the control you have over the payment of this last portion of your state taxes – the fourth quarter installment, if applicable, and/or the last 10 or 20 percent you will owe. Since you have the choice of paying a portion of your state income taxes either in December of the current year, or in January or even April of the following year, the decision on when you write out the check to pay these taxes will have a direct impact on the AMT you will pay.

By having more of your state income taxes paid in a year when you are not in the AMT, you will achieve real tax savings.

An example

To illustrate how this works, assume that you expect to be in the AMT in 2010, that your total 2010 state taxes will be $15,000, and that you expect not be in the AMT in 2011. If you could defer paying just 10% – $1,500 – of your 2010 state income tax until 2011, this could save you $500 or more depending on your tax bracket. If you could defer $3,000, your savings would be over $1,000, and so on. Note that even if you do end in the AMT again next year, continuing to execute this strategy will mean that you will achieve this Regular Tax benefit in the first year that you are not in the AMT. With the Democrats pushing for higher income tax rates, this becomes more and more a real possibility.

What you need to do to evaluate this AMT-saving strategy

Check on your state’s web site to determine the minimum percentage of your taxes that have to be paid in by December 31. It likely is 80% or 90%. Also check the rules for estimated payments and the forms that you will need to do this. Then, using an AMT planning model like that available on amtindividual.com, try putting different numbers in the model for your state tax payments, and you quickly will see how much you might be able to save by reducing your AMT.

Good luck with your planning!

Posted in Calculation of the AMT, State Income & Other Taxes | No Comments »

Impact of Itemized Deductions on the Alternative Minimum Tax

Thursday, May 13th, 2010 | Print This Post | Email This Post

In previous articles we talked about the different tax brackets for the Alternative Minimum Tax and the Regular Tax, and the AMT exemption and how its phase-out throws a lot of people into the AMT. This was a review of the income side of the AMT calculation – i.e., how a taxpayer’s income level can act like a vortex pulling him into the AMT. Now we are shifting gears and addressing the deduction side of the calculation.

Itemized deductions

The bulk of the AMT problem actually comes from the deduction side – specifically, deductions that an individual is allowed to take in computing the Regular Tax but is not allowed to take for the AMT. Of the different types of deductions, some are not allowed at all for the AMT, while others are allowed but to a lesser extent than they are allowed for the Regular Tax.

The deductions that are allowed for the Regular Tax but are not allowed at all for the Alternative Minimum Tax are the following:

- the deduction for state and local taxes

- miscellaneous itemized deductions

- the standard deduction

- the deduction for personal exemptions

The deductions that are allowed for the Regular Tax but are allowed only to a lesser extent for the AMT are these:

- the itemized deduction for medical and dental expenses

- the deduction for interest paid

- many business expenses such as depreciation, depletion, and research expenses, among others

State and local taxes affect more than 90% of all AMT payers

Of the deductions listed above, the single one that impacts almost every individual caught in the AMT trap is the deduction for state and local taxes. These are relatively large dollar items for most taxpayers, and, as mentioned above, they are not deductible at all for the AMT.

The term “state and local taxes” includes the following:

- State income taxes. Forty-three states impose a state income tax, and some of them – New York and California come to mind along with numerous others – have fairly high tax rates for folks who are at the income levels already being affected by the AMT. (Residents of the following states are the lucky ones who do not share this burden: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming.)

- Local income taxes. Many cities across the United States impose their own income taxes. New York City, of course, has one, and other cities across the nation – Louisville, Kentucky is one other example – also have them. New York City’s tax rate ranges from 2.9% to 3.6% of taxable income, while Louisville’s is 2.2% on gross earned income – no deductions allowed. Taxes like these quickly compound the AMT problem.

- Real estate taxes. Owners of real estate pay property taxes on the value of the property (an “ad valorem” tax). Many states – you know if you live in one – have high property taxes. Again, a big AMT problem.

- Personal property taxes. It is not uncommon for states and local jurisdictions to impose a property tax on personal property. “Personal” is a legal term meaning tangible but moveable property such as cars and boats. Check the tag renewal notice on your car, for example, to see how much this is.

- Sales taxes. All states but six impose a sales tax. On the Federal return the taxpayer has an option to deduct state and local sales taxes in lieu of income taxes. In the seven states with no income tax this election generally proves beneficial in computing the Regular Tax – but of course it is no help when it comes to the AMT.

In the next article we’ll look at the effect these lost itemized deductions have on calculation of the AMT, and we also will review the significant tax planning opportunities that they present.

Posted in Calculation of the AMT, State Income & Other Taxes | 1 Comment »

Top 10 Traps Set by the AMT

Saturday, April 10th, 2010 | Print This Post | Email This Post

Of the nearly 30 different items that can cause taxpayers to fall into the AMT, a few are much more common than others. Here is a quick look at the “top ten” list of those that snare the most Alternative Minimum Taxpayers.

# 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.

Posted in Capital gains & Dividends, Depreciation & Disposition of Property, K-1 / All other AMT Items, Medical And Dental, Misc Deductions 2-percent Floor, Personal Exemptions, Private Activity Bonds, Standard Deduction, State Income & Other Taxes | No Comments »

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

Sunday, December 27th, 2009 | Print This Post | Email This Post

Year-End AMT Planning Wrap-Up – Part 1

In our 10-week series of articles on tax planning for the Alternative Minimum Tax, we have looked at many things a taxpayer can do to reduce his AMT liability. With only four days left in which to act in order to reduce 2009’s taxes, here is a summary of these items, with reference to the date each article appeared on amtblog.com. Please refer back to the article for the specific tax-saving steps that still may be taken before year end.

State and local taxes

This item affects 94% of all AMT payers, yet it is one of the easiest to plan for and it can have the most direct impact on a taxpayer’s Alternative Minimum Tax. There are three types of taxes here:

1. Property taxes – by weighing the relative factors of property tax burden, percentage of AMT payers, and size of population, here is a ranking of the top 10 states that are hit the hardest by this item. Residents of these states really do need to focus on this one in particular. See the November 8th article posted on amtblog.com, “Property Taxes.”

#1 – New York
#2 – New Jersey
#3 – California
#4 – Illinois
#5 – Massachusetts
#6 – Connecticut
#7 – Maryland
#8 – Pennsylvania
#9 – Virginia
#10 – Ohio

2. Income taxes – the tax dollars here are larger, on a per-taxpayer basis, than property taxes. While the AMT planning takes a little more work than property taxes, the potential savings still are there. See the amtblog.com article posted on November 2nd, “State Income Taxes.”

3. Sales tax on new cars – this is easy money for those who bought a new car this year, or still are contemplating buying one. See the amtblog.com article posted on November 11th, “Sales Tax on New Cars.”

Stock options, in particular Incentive Stock Options (ISOs)

A large number of corporate employees, generally ranging from the mid-management level up to the “C Suite” folks, have stock options granted to them by their employers. If these options are ISOs, AMT planning is critical because of the major impact the exercise of these options can have on an individual’s Alternative Minimum Tax. Our two-part series of articles appearing on amtblog.com on December 3rd and December 6th, “Incentive Stock Options – Parts 1 and 2,” go through the basic steps in determining whether a taxpayer does in fact have an ISO – often confused with the other types of stock options and equity grants an employer may offer – and then explains how these ISO exercises trigger the AMT. This is a very important read for all those who either have exercised stock options or are contemplating exercising stock options.

Capital gains

The impact of capital gains on a taxpayer’s Alternative Minimum Tax can be a real surprise – and, unfortunately, not a pleasant surprise At first blush capital gains appear to be AMT-neutral, but this is far from the case. The December 13th article on amtblog.com, “Investments – Capital Gains,” explains this issue. To the extent a taxpayer has recognized capital gains in 2009, and/or “harvested” capital losses to offset capital gains, there can be a direct AMT impact. Any capital gain or loss activity between now and December 31 also will have this impact.

Summary

It is not too late to take action on any of the above items for 2009, but time is short. Once the ball drops in Times Square, you’ll be planning for 2010!

Posted in AMT Planning in General, Capital gains & Dividends, Incentive Stock Options Exercised, State Income & Other Taxes | No Comments »