November 18th, 2009 | 
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Standard Deduction
A taxpayer has a choice of itemizing deductions or taking the Standard Deduction in computing his Regular Tax liability. The Standard Deduction is a fixed dollar amount that varies depends on filing status. In tax year 2009 it is $5,700 for Single and $11,400 for Married Filing Jointly – what we’ll call the base Standard Deduction.
State sales taxes paid in 2009 on the purchase of a qualifying new automobile can be added to the base Standard Deduction. Similarly, a limited amount of real estate taxes, and certain casualty losses, also may be added.
For purposes of the Alternative Minimum Tax, however, the base Standard Deduction is not allowed. But if the taxpayer was eligible to take a Regular Tax deduction for a casualty loss or for the new car sales tax in addition to the Standard Deduction, these items also are allowed for the AMT. The Form 6251 shows the AMT payer how to do this. Note also that if the Standard Deduction is chosen for Regular Tax purposes, it must also be used when calculating the AMT – it is a binding tax election.
The choice between itemizing and taking the Standard Deduction seems simple: if the total of a taxpayer’s itemized deductions is less than the Standard Deduction, then the Standard Deduction will result in less being paid. But this is not always the case when the Alternative Minimum Tax is involved. For AMT payers, there are certain situations where itemizing for Regular Tax purposes actually could lower the amount of AMT paid.
To illustrate, assume a taxpayer lives in Florida (no state income tax), rents instead of owns a home (no real estate taxes or mortgage interest), and didn’t make any taxable purchases this year (no sales tax deduction). But suppose this taxpayer also gave $10,000 to charity. The Standard Deduction for 2009 for joint return filers is $11,400, so this would appear to be the better choice. However, if the taxpayer were in the Alternative Minimum Tax there would be no benefit at all from the Standard Deduction, but there would be a benefit of up to $2,800 (the 28% Alternative Minimum Tax bracket times the $10,000 charitable contribution deduction) if itemizing is elected instead. Even the lower 26% tax rate would result in nearly the same benefit. So, somewhat counterintuitively, in this example opting to pay more Regular Tax will result in a lower overall tax liability.
The above example does not include mortgage interest, which is treated differently for AMT than for regular tax purposes. Taxpayers who itemized can deduct qualified residence interest on up to two residences. The deduction is limited to interest on acquisition indebtedness up to $1 million and home equity debt up to $100,000. Comparatively, the AMT mortgage interest deduction is limited to qualified housing interest, which includes only the interest incurred to acquire, construct, or substantially improve the taxpayer’s personal residence and one other dwelling used for personal purposes. Home equity loan interest is only deductible if it meets the definition of qualified housing interest. For AMT, a positive adjustment is required in the amount of the difference between qualified residence interest allowed as an itemized deduction for regular income tax purposes and qualified housing interest allowed in the determination of AMTI.
There is an adjustment for a portion of the mortgage interest that is not used for purchase of a home or improvements on the house. This is a add back to AMT.