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Can You Actually Increase Your Tax Bill With Your Deductions?

As a diligent taxpayer, you probably keep good records so you can make the most of itemized deductions when you or your accountant fills out your tax return. Did you realize though, that those deductions might expose you to an entirely different set of rules that could result in additional taxes?

The alternative minimum tax (AMT) is a tax that could be more than the regular income tax. Congress’s logic for the AMT was to stop individuals with high incomes from using special tax breaks and thus paying little or no tax at all. However, more and more taxpayers are finding themselves subject to the AMT, even though they don’t have extraordinarily high incomes or use many special tax benefits.

The Taxpayer Advocate Service, an independent organization within the IRS, reported that the AMT affects substantial numbers of middle-income taxpayers and will, absent a change of law, affect more than 30 million taxpayers by 2010. Inflation is a big reason more and more individuals may be hit with the AMT since the threshold for AMT doesn’t move automatically with inflation unlike the rest of the tax regulations.

Especially exposed are those with incomes between $100,000 and $500,000. However, don’t think that just because your income is less, you won’t have a problem. In the coming years, the share is expected to expand the most for taxpayers with incomes between $50,000 and $500,000.

The AMT has its own rules that are not as generous as the regular rules to determine how much a taxpayer should pay. If you are paying at least that amount, you don’t have to worry about the AMT. But if your regular income tax is below the AMT, you’ll have to pay the extra tax.

There are a number of items that cause you to have an AMT liability. These include:

· Exemptions for a spouse and dependents

· Medical expense deductions

· State and local taxes, including property and income taxes

· Interest on second mortgages, unless the money was used to buy, build, or improve the home

· Interest on home equity loans, unless the money was used for home improvements

· Miscellaneous itemized deductions

· Certain credits

· Capital gains

· Incentive stock options

· Tax-exempt interest from private-activity bonds

· Tax shelters

Tax planning is the key to making sure that you pay no more than necessary, whether you are subject to the standard rules or AMT rules. For instance, you may find that you might have to pay the AMT in some years but not others. One strategy would be to “bunch” some of these deductions, such as miscellaneous itemized deductions and medical expenses, in non-AMT years, since they won’t be of benefit in years in which AMT applies. It is strongly recommended that all investors consult with their own qualified tax and financial advisors prior to making any investment decisions.

Comments (2)
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2 Existing Comments
  1. Lori said:
    on October 4th at 02:46 pm

    Often if you tax one group, it will eventually affect all groups. That’s just how those laws work.

  2. Joemama said:
    on October 6th at 12:22 am

    Stupid title on this article — the 1040 has you calculate your taxes using both the regular method and the AMT — then you pay the least amount. Deductions cannot “increase” your tax bill.