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  • My 1st encounter with AMT tax

    Posted by Frugal on April 20th, 2006

    If you have never paid AMT or Alternative Minimum Tax, you may not be familiar with the intricacy of the other tax system.  About 2 or 3 years ago, I knew that most likely I had to pay AMT that year.  So in order to reduce my federal income tax, I did what I normally do, over-paying or pre-paying my state and property tax so that I can have more itemized deduction, ihoping to reduce my federal tax and AMT.  Everything was well-planned and well-executed.  Until the next year when I tried to file my tax, I finally discovered the stupidity of my tax strategy.  On the AMT tax form 6251, line #3, you actually add back all the state and property tax when you calculate your AMT income.  So by over-paying my state tax, I actually got zero tax benefit for the current year, while at the same time, getting a bigger state tax refund to be taxed federally for next year.  By pre-paying my property tax, I got no benefit for federal tax, and slight benefit for my state tax.  My tax strategy totally back-fired.

    After that incident, I’ve made my own tax calculator to estimate my regular and AMT taxes, so that I don’t make the same stupid mistake again.  Going through Form 6251 once, I also learned other details, such as mortgage interests are deductible from AMT income, but not the interests from a refinancing loan.  And personal and child exemption amounts are all added back to the AMT income.  The most significant saving grace from paying AMT is the AMT exemption amount which is $58000 for year 2005.  However, in 2006, this exemption amount is dropping back to $45000, and is going to affect some 15 million people.  Congress has not been able to pass the AMT tax reforms, because they need to find additional tax dollars from elsewhere if they ever extend the 2005 exemption amount of $58000 for year 2006 and beyond.  You can write to your congressman here if you think this tax issue will affect you.  I think AMT should not be meant for a working family with 1 or 2 children, but rather for richer people.


    More related posts:
  • AMT tax patch for 2007 passed in House Committee
  • Why is your home the best investment?

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    6 Responses to “My 1st encounter with AMT tax”

    1. Million Dollar Goal » Carnival of Personal Finance #45 Says:

      [...] My 1st encounter with AMT tax  – If you have never paid AMT or Alternative Minimum Tax, you may not be familiar with the intricacy of the other tax system. [...]

    2. Cheap Charlie Says:

      I’ve been paying into AMT for the last 3 years – not fun since I have not been able to write-off my high Calif property taxes with AMT.
      Are you aware of this?

    3. frugal Says:

      If you are consistently paying into AMT, most likely you cannot avoid it. The general strategies to avoid AMT are
      1. Not generating capital gain if you don’t have to.
      2. Shift your state tax or property tax payments to next year (assuming next year you don’t need to pay AMT).
      3. Any items on the AMT tax forms that you are able to make them smaller.

      I guess you have a relatively high amount of property & state taxes, compared to your income level. In that case, it’s hard to avoid it.

    4. tax liens Says:

      Under the second fix, you can use your nonrefundable personal tax credits (such as the dependent care credit and the Hope Scholarship and Lifetime Learning higher education credits) to reduce both your 2006 regular tax and AMT bills (same as for 2005). You will also be able to use the new residential and nonbusiness energy property credits to reduce both of these taxes for 2006. So, if you are considering making energy efficient improvements to your home, you might want to do it now rather than waiting until next year.

    5. john beck Says:

      Under the second fix, you can use your nonrefundable personal tax credits (such as the dependent care credit and the Hope Scholarship and Lifetime Learning higher education credits) to reduce both your 2006 regular tax and AMT bills (same as for 2005).

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