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The alternative minimum tax's Catch-22

Tax Talk by George Saenz •

George SaenzDear Tax Talk,
We triggered AMT (alternative minimum tax) last year. I have read your expert answers and am confused. Someone asked if they should avoid claiming deductions so as to not trigger AMT. You answered that you should at least claim enough to get close to AMT. Is there a point where you can end up paying less than the AMT (it sounds like a contradiction in terms)? Catch-22. It seems to me, you just have to bite the bullet (or hire a sober accountant).
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Not claiming deductions beyond the AMT means you still have to figure them both out, correct? Or else you end up paying more than the AMT because you don't bother to itemize the deductions you are due, right? Of course, I have friends who suggest that we stop contributing to charity, since they end up not being tax-deductible anyway! We live in Kansas, with high property taxes.
-- Leanne

Dear Leanne,
The dreaded alternative minimum tax. It's not enough that we have one tax system, we also have a secondary system designed to scale back the great deductions and credits that you get in the regular tax system.

Originally designed to make higher income taxpayers pay a minimum amount of tax, the AMT is now affecting more and more middle-class families. There's talk of reform, but with the budget deficits who believes that Congress or the President will want to cut revenues? The principal differences between tax deductions for regular tax and for AMT are taxes and miscellaneous itemized deductions such as investment and employee business expenses. Charitable contributions continue to reduce both the regular tax and AMT, so you don't lose the benefit of your generosity.

Once you have so much in taxes and miscellaneous deductions that it puts you into an AMT position, you don't have to bother looking for more of these deductions as they don't help reduce your tax liability. For example, if you start doing your return and your husband hasn't given you his employee business expenses, but you realize that with all your other deductions, you are in the AMT, his expenses are meaningless. Either you can leave off the expenses or ballpark them as they won't be changing your tax liability. The same thing goes for tax receipts, since they're added back for AMT.

Yes, you do have to compute both to figure out if you're falling into the alternative, but once you hit that point, you have less to worry about.

-- Posted: March 8, 2005

Look out for alternative tax land mines



Can I skip deductions to avoid the AMT?


Picking specific deductions to avoid the AMT


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