Just when you thought you've done your tax planning and you’re ready to start doing your return, I urge you -- no, beg you -- to take a hard look at the alternative minimum tax.
It may cost you more on your 2009 tax return. It could cost you on your 2010 return as a growing number of us get sucked into it just for buying a new home or having another child.
The AMT (which I think should be renamed the awfully mean tax) is an alternative tax computation that disallows your personal exemptions and many of your deductions. After allowing a given AMT exemption, the balance is subject to a flat 26% or 28% rate. You use Form 6251 (.pdf download) to do the computation.
The AMT is tricky and can cause you all sorts of trouble.
In recent years, Congress has voted to reduce -- but not eliminate -- the potential of having to deal with the AMT.
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It's 2010 that you should start to think about. Congress will be under to exend and increase the exemption amounts into 2010 and further.
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Whether the AMT is going to hit you depends on your particular tax and financial position, and on where you live.
So, here are some of the pitfalls to watch for and tips on how to organize your finances to minimize your odds of being slammed with the AMT, and what to do if this tax tsunami washes away your refund.
Who gets hit
You may get hit if:- You live in one of those states without a state income tax. Sorry, but it may be time to come down to earth and wipe that smile off your face. In the name of tax equity and fairness, Congress has resurrected the deduction for sales taxes. You can now deduct the higher of your state and local income taxes, or the sales tax you paid during the year. But these taxes you pay and deduct are included in what the tax pros call AMT preferences. That means they're not allowed as deductions for the computation of the AMT.
- You live in a state with high state and local taxes, including income, property, personal property and, yes, sales taxes. Nearly half the people paying the alternative minimum tax in 2005 lived in California, Connecticut, the District of Columbia, Maryland, Massachusetts, New York or New Jersey. High property taxes -- they can be $10,000 or more in parts of New York and New Jersey -- can easily trigger the AMT.
- You have a large family. I have a client with eight children who's hit by the AMT every year. That's because he loses 10 personal exemptions in the AMT calculation. For 2009, that's like increasing his taxable income by $36,500.
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