My First Encounter with the Alternative Minimum Tax (AMT)

Written by nickel - 2 Comments

This article is a guest blogger submission written by ‘frugal’ and first published at 1stMillionAt33. If you like what you see, why not subscribe to his RSS feed?

If you have never paid the AMT or Alternative Minimum Tax, you may not be familiar with the intricacies of this ‘other’ tax system. About 2 or 3 years ago, I knew that most likely I had to pay the AMT that year. So in order to reduce my federal income tax, I did what I normally do, over-paying or pre-paying my state and property tax so that I can have more itemized deduction, hoping to reduce my federal tax and AMT.

Everything was well-planned and well-executed. But the next year when I tried to file my taxes, I finally discovered the stupidity of my tax strategy. On the AMT tax form 6251, line #3, you actually add back all the state and property tax when you calculate your AMT income. So by over-paying my state tax, I actually got zero tax benefit for the current year, while at the same time, getting a bigger state tax refund to be taxed federally for next year. By pre-paying my property tax, I got no benefit for federal tax, and slight benefit for my state tax. My tax strategy totally back-fired.

After that incident, I’ve made my own tax calculator to estimate my regular and AMT taxes so that I don’t make the same stupid mistake again. Going through Form 6251 once, I also learned other details, such as mortgage interest is deductible from AMT income, but the interest from a refinancing loan is not. And personal and child exemption amounts are all added back to the AMT income. The most significant saving grace from paying AMT is the AMT exemption amount which is $58,000 for year 2005. However, in 2006, this exemption amount is dropping back to $45,000, and is going to affect some 15 million people. Congress has not been able to pass the AMT tax reforms, because they need to find additional tax dollars from elsewhere if they ever extend the 2005 exemption amount of $58,000 for year 2006 and beyond. You can write to your congressman if you think this tax issue will affect you. I think the AMT should not be meant for a working family with 1 or 2 children, but rather for richer people.

Published on June 30th, 2006 - 2 Comments
Filed under: Taxes
email this post - digg this - stumble it - save to del.icio.us

Did you find this article useful? If so, please sign up to receive e-mail updates:

Comments (scroll down to add your own):

The $58,000 exemption for 2005 was just recently increased to $62,550 for 2006 only, with more action needed to extend it beyond 2006. Here’s the details:

One-year Alternative Minimum Tax Fix

TIPRA includes two quick fixes, for this year only, to the individual alternative minimum tax (AMT) rules. These changes will prevent millions more (possibly including you) from owing the dreaded AMT this year. Under the first fix, the 2006 AMT exemption amounts are increased as follows:

* To $62,550 for married individuals who file jointly (up from the 2005 figure of $58,000). Without the fix, the 2006 exemption would have been only $45,000.

* To $42,500 if you are a single individual or head of household (up from the 2005 figure of $40,250). Without the fix, the 2006 exemption would have been only $33,750.

Under the second fix, you can use your nonrefundable personal tax credits (such as the dependent care credit and the Hope Scholarship and Lifetime Learning higher education credits) to reduce both your 2006 regular tax and AMT bills (same as for 2005). You will also be able to use the new residential and nonbusiness energy property credits to reduce both of these taxes for 2006. So, if you are considering making energy efficient improvements to your home, you might want to do it now rather than waiting until next year.
Comment by John — Jun 30th 2006 @ 10:07 am
Under the second fix, you can use your nonrefundable personal tax credits (such as the dependent care credit and the Hope Scholarship and Lifetime Learning higher education credits) to reduce both your 2006 regular tax and AMT bills (same as for 2005).
Comment by tax liens — Nov 12th 2006 @ 11:48 pm