Similar to state income taxes, for Regular Tax purposes a taxpayer is allowed a deduction for all property taxes that are paid. Under the AMT, however, the taxpayer is allowed no deduction for property taxes. This problem affects almost 100 percent of all individuals paying the Alternative Minimum Tax, so it is something that one definitely needs to look into. This also represents one of the easiest AMT planning opportunities that an individual taxpayer can do something about.
Real estate taxes
Property tax assessment and billing cycles vary among the states, but the basic concept to consider is the control a taxpayer may have over paying a tax bill in December or in January. As was previously discussed in the article on state income taxes, this same concept also applies to property taxes.
Shown below is an example of an actual property tax bill a homeowner would have received 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 over a period of several months. With this example it is easy to see the direct impact on the AMT a taxpayer can have.
|Assessed property value||$500,000|
|Property tax rate||1.0724%|
|Property tax due||$5,362|
|The payment schedule as shown on the actual bill:|
|If paid by||10/31/10||the amount due is||$5,255||(2% discount)|
|“||after 1/31/11||“||6,488||(21% penalty)|
The AMT-saving strategy for property taxes is extremely simple in this example, since the taxpayer has a choice of paying the property taxes in 2010 or in January, 2011. The simple act of when the check is written out will have a direct impact on the amount of AMT paid. As mentioned above, a taxpayer would get no benefit from a property tax deduction in a year he is in the AMT. By paying the property taxes in a year the individual is not in the AMT, however, real tax savings will be achieved.
In this example, if the taxpayer is in the AMT this year but does not expect to be in the AMT in 2011, by waiting until January to pay this bill up to 35% in Federal income taxes (39.6% is tax rates are allowed to increase) could be saved. This obviously is much greater than the 2% discount that would be foregone, as well as the 5% penalty that would be incurred.
A particular state’s property tax assessment and billing cycle likely will vary from this example, but the concept applies to all taxpayers – to the extent an individual can, without incurring penalties with which he would not be comfortable, control even a portion of the timing of payment of property taxes, savings will be realized on his AMT bill.
Personal property taxes
Many states impose taxes on the value of personal property. 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. The dollars may be smaller, but if it is easy to do, why not?
Assume a state’s personal property tax rate is 1.5%, for example, and the taxpayer owns a $40,000 car. The property tax on this automobile will be $600. If there is an opportunity to pay this tax in one year versus another (see the December – January example above), this could be an easy way to shave a few hundred dollars off an individual’s AMT bill.
The higher a state’s property taxes are, the more important it is that Alternative Minimum Tax payers give this item some personal attention.