Tax Deduction Denied

I started doing my taxes last weekend. I’m not ready to file yet, but I just wanted to see where I stand. When I compared my first run with my 2005 tax return, I noticed that although my income was higher in 2006, my total itemized deduction was a few thousand dollars less than that on the 2005 return. How come? I knew I missed something. When I took a closer look, I realized I forgot to put in the property tax I paid in 2006. “How could I have missed such a big chunk of deduction?” I beat myself on the forehead. I dug up the property tax bill and put the number in. But the bottom line number, the amount I owe, didn’t change at all. That’s insane, isn’t it? I found myself a big deduction but my tax bill didn’t budge.

What happened? Software error? No. I found myself joining millions of other taxpayers in the dreaded AMT Club. AMT stands for Alternative Minimum Tax. This is a club that you don’t want to join but the IRS will throw you in there involuntarily. When you are in this AMT Club, you are legally discriminated against. Many traditional tax deductions are no longer a deduction. These include:

  • state and local income tax
  • property tax
  • exemptions for yourself, your spouse, and your dependents

All those are bundled into one AMT exemption. No matter how many exemptions you have, how much more you pay in state income tax, or how much more you pay in property tax, the AMT exemption is still the same. Naturally, AMT discriminates against:

  • Families with children
  • People living in states with high state income tax: California, District of Columbia, Hawaii, Iowa, Maine, and Oregon all have top state income tax bracket above 8%.
  • People living in places with high real estate price and property tax

Fortunately these deductions are still allowed under AMT:

  • mortgage interest
  • charitable donations

That’s about it. Almost everything else is not allowed in the AMT Club.

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Comments

  1. indexfundfan says

    Welcome to the club. Once you are in AMT land (like me), there is not a whole lot you can do to get it off your back. What’s the use of all the tax cuts when AMT is not fixed?

  2. samerwriter says

    The discrimination from AMT isn’t much more egregious than all the other income-based discrimination.

    High wage-earners can’t contribute to IRAs, can’t deduct student loan interest, and have some deductions phased out based on income.

    I’m actually a fan of the AMT. Once you no longer have to bother calculating your traditional tax liability, AMT is much simpler to deal with, and it cuts back on government sponsored social preferences.

  3. Harry Sit says

    You two sound like veteran AMT club members or shall I say fellow jail mates?

    @samerwriter: I don’t know how you find AMT simpler to deal with. That Form 6251 looks very complicated to me. One relief in the AMT jail is that I will never bother reading those “20 tax deductions you missed” articles because they won’t matter any more. Maybe that’s what you meant. The tax bracket calculation does become simpler: federal + state. For federal, it’s either 26%, 32.5%, 35% or 28%.

  4. Anonymous says

    On the positive side, you are now officially considered a “rich person”. Millions are counting on you to pay your taxes, so they won’t have to.

  5. john Duncan says

    One thing about AMT that is good. I dont really want to subsidize the state of NY or Ohio. Someone there with my income pays less Fed tax than I do, but for the AMT. I live in Illinois which has a relatively low state income tax, but I still get hit with AMT, just less than I would in NY or Ohio.

  6. Anonymous says

    If you are being continually hit with AMT, does it make sense to transfer your house (and property taxes) to some kind of trust? If you put the house in a trust then also move some kind of incoming producing asset into the trust, then can the trust realize the property tax deduction? Seems like there might be some way at least to get the property tax deduction back in effect this way.

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