Overview
Alternative Minimum Tax -- A Second Tax Computation
Alternative Minimum Tax (AMT) was designed to
catch those few that had very high income, but paid no income tax.
Unfortunately, the Alternative Minimum Tax is trapping many
"normal" taxpayers.
The Alternative Minimum Tax and Regular Income
Tax computations are two different, but related, computations. The highest
tax rate for the AMT is lower than the highest tax rate for Regular Income
Tax. However, there are fewer deductions for the Alternative Minimum Tax.
Thus, when AMT applies, the AMT taxable income, less exemptions, is usually
larger than the Regular Tax taxable income.
Some items that can reduce Regular Income Tax,
but do not reduce Alternative Minimum Tax are:
- Various "timing" deductions,
- Personal Exemptions,
- Medical Deductions (limited for Regular Tax,
but more limited for AMT),
- Itemized Deductions for State and Local
Taxes,
- Certain types of mortgage interest, and
- Itemized Miscellaneous deductions.
For example, if you paid a very large
amount of state income tax, that could lower Regular U.S. Income Tax
without lowering Alternative Minimum Tax. The result could easily be that
you will pay AMT when you were planning to pay no tax.
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Alternative Minimum Tax Planning
When permanent adjustments (like Itemized
State Income Taxes) are the source of the AMT, there is a planning
strategy that is frequently available.
With traditional tax planning, the taxpayer
often moves deductions from next year to this year and moves income from
this year to next year. That traditional tax planning sometimes triggers
Alternative Minimum Tax! You want to do the opposite.
A POSSIBLE SOLUTION:
If you
will pay AMT this year but not next year, consider moving your
Itemized State Income Tax deduction to next year! That way you save
for next year the deduction that you will lose this year.
The best way to illustrate
this strategy is with an example. By deferring about $10,000 in state
income tax withholding from this year to next year you save about $1,100.
See our example.
You can see, using the
Alternative Minimum Tax Planner, whether deferring state income tax
payments/withholding can save on U.S. taxes. Simply looking at the
program's printouts will give you an idea how much you will save and how
much state income tax to postpone to next year.
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How To Make This Analysis Yourself
Current Version
Most current version: AMTI2009.10
Release Date: 12/3/2008
Requirements
Microsoft Windows.
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Price
$149 (+$7 Handling)
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Limitations:
The program can compute the maximum benefit
for reducing state income tax payments. The program can also determine
the level of state tax payments or withholding that results in the minimum
amount of U.S. tax. The program does not determine your penalty free level
of estimated or withheld state income taxes. This amount is typically
equal to last year's state income tax. However, there may some
instances where you should pay in more than last year's state tax.
The Alternative Minimum Tax Calculator does
not have a separate input for state income tax refunds which are not income
for AMT purposes.
The program uses the current year's tax rates
and tax computation for the next year's computations. This is because
tax rates and phase out amount are known for the current year, but not the
next year.
We strongly advise that tax professionals do
this computation.
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