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.
Learn the Nuts and Bolts
I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.