My wife and I pay significant state (Ohio) income tax and
local real estate tax (around $30,000 total in 2004), which
we do not benefit from anymore because when we itemize on
Schedule A they are added back to our income when figuring
the AMT tax (Ugh!).
Would I be better off keeping track of sales tax in 2005
and using that as our deduction instead of income and property
tax? My TurboTax calculation for 2004 automatically defaulted
to the higher tax deduction. Any advice? Thanks. -- Michael
Not only do you have to deal with regular income tax, but
some folks such as yourselves have to deal with an alternate
tax system known as the alternative
minimum tax (AMT). The AMT is designed to take away some
of the deductions you get for regular tax and force you to
pay at least an alternative minimum amount of tax.
AMT is computed on Form
6251. Your starting point on this form is your adjusted
gross income less your itemized
deductions. Then the form goes on to add back your itemized
deductions for all taxes and miscellaneous
itemized deductions such as employee business expenses.
Since you claim a large deduction for taxes, the AMT becomes
greater than your regular tax so that you have to pay AMT.
Since all taxes are added back for AMT, it would not make
a difference whether you claim state income taxes or sales
taxes. The property taxes are deducted for regular tax,
in addition to the larger of the sales tax or income tax,
but also form part of the add back for AMT.
The only good advice I can offer besides moving from Ohio
is to look at your property tax deduction. (You can read more
about Ohio taxes in Bankrate's state
tax roundup.) If you pay property taxes on investment
properties then the law allows you to capitalize these taxes
to the cost of the property instead of claiming the deduction.
By capitalizing the taxes you add the taxes to the cost of
the property which later reduces your taxes when you sell.
Since the property taxes do not reduce your overall tax liability,
you don't lose currently by deferring the deduction until
you sell the property.
In order to capitalize property taxes you need to attach
the following statement to your return:
"Taxpayer elects pursuant to IRS Sec. 266 and Regs.
Sec. 1.226-1(c)(3) to capitalize the following items which
would otherwise be deductible with respect the taxpayer's
2004 taxable year:"
Followed by an itemization of the taxes to which the election