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Tax Talk with George Saenz

Ask the tax adviser

To my readers:
I appreciate all the questions you send each week. But because of the volume, you may not have the answer you need with the filing deadline less than a week away. If you haven't heard back from me and you really need an answer before you can file, check out the full Bankrate Taxes site, especially my previous columns and the Tax Toolbox. What you need may be there. If not, consider seeking an extension of time to file your federal and state returns so you'll have time to get the tax answer you need. But remember: if you do get an extension, be sure to pay what you might owe to avoid interest and penalties.

Can I avoid the AMT by skipping deductions?

Dear Tax Talk:
I paid a very large state income tax bill last year because of a large capital gain on the one-time sale of income property.

This year my income is more typical, but if I deduct all the state income tax, I will have to pay the AMT. I would rather not fool with Form 6251.

Is there a law that says I must deduct everything I am able? It seems taxpayers are always overpaying (and not being refunded) taxes because of a failure to take deductions to which they are entitled. In this case, just such a move will save me headaches and money. What is your advice?
Brian

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Dear Brian:
No one wants to fool with Form 6251, which relates to alternative minimum tax. The AMT is the minimum amount of tax the government is willing to rake you for when you have what are known as tax preferences and claim certain deductions, such as state taxes.

Looking at the form, at least while sober, is intimidating. However, not completing the form can lead you to lose a tax benefit known as the 'AMT credit carryforward,' which is claimed on equally intimidating Form 8801, Credit for Prior Year AMT. Fortunately for your liver, you only have to complete Form 8801 on your next year's tax return.

The AMT comes from claiming tax preferences and certain large itemized deductions, such as state income taxes and miscellaneous itemized deductions. These items are either computed differently for AMT (timing differences) or not allowed at all for AMT (exclusion items).

If an item is a timing difference, then you can claim a credit in a subsequent year against your regular tax liability for the AMT attributable to that item in a prior year. If an item is an exclusion item such as taxes and miscellaneous itemized deductions, then you do not get a credit for that item going forward. If you have a mix of timing differences and exclusion items, you need to complete Form 6251 so at least you have the credit to 'carryforward.'

I don't know of any rule that requires you to claim all the deductions to which you are entitled. However, you should at least claim as much of the state taxes that you paid as you can without sending you into AMT. Alternatively, I recommend you visit a sober paid preparer, if you can find one this time of year.

-- Updated: April 5, 2004

Read more Tax Adviser stories here.
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See Also
Some taxes are useful in reducing your IRS bill
Tax Tool Box: Deductions and credits

Getting caught in the AMT trap

More tax adviser stories

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