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.
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