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The AMT is a parallel tax system with its own set of rules. Originally designed to make sure wealthy people could not use legal deductions and loopholes to drive their tax bill to zero, the AMT is now increasingly affecting the middle class. The AMT does not allow deductions for state and local taxes, home-equity loan interest (unless the borrowed money was used for home improvements), or items such as investment expenses. Nor does it allow personal exemptions -- worth $3,400 this year -- for yourself, your spouse and each of your dependent children.
Essentially, you have to figure your taxes under two sets of rules -- the regular tax code and the AMT -- and pay whichever is higher. Regular tax brackets are indexed for inflation but the AMT isn't. Consequently, your chance of being trapped by the AMT increases each year, particularly if you claimed large deductions for state income taxes or property taxes or have a large family.
Congress approved a last-minute patch that will prevent about 23 million new taxpayers from being hit by the AMT this year, compared to four million who paid it last year. The president is expected to sign the legislation to enact the one-year fix.
Still, if you paid the so-called "stealth tax" last year, you'll probably be caught again this year. That means you don’t want to pre-pay your January mortgage interest or state income taxes that you can’t deduct under AMT rules. However, you can go ahead and make your normal year-end charitable contributions which are deductible even if you pay the AMT.
Return to: 15 Year-End Tax Moves
READER COMMENTS
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POSTED BY: pshotts (December 05, 2007 07:58 PM)
I haven't seen information about the referenced "patch" anywhere. How is it progressing and when should it be enacted? If it isn't enacted, then what should I do with all of my end of the year charitable contributions? Hold them for next year or double them up? I'm a subscriber to your magazine and haven't seen guidance there either. Help would be appreciated.
POSTED BY: Mary Beth Franklin (December 06, 2007 10:11 AM)
Go ahead and make your charitable contributions for 2007. It's one of the few deductions that is allowed under the AMT.
POSTED BY: Mary Beth Franklin (December 06, 2007 10:27 AM)
Thanks for your comments. The Senate, which failed earlier this week to reach agreement an an AMT patch year, will try again today. Time is running short for the IRS to print forms and reprogram computers for the new tax filing season and that could delay processing of tax returns for all taxpayers--not just those who pay the AMT.
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POSTED BY: pshotts (December 05, 2007 07:58 PM)
I haven't seen information about the referenced "patch" anywhere. How is it progressing and when should it be enacted? If it isn't enacted, then what should I do with all of my end of the year charitable contributions? Hold them for next year or double them up? I'm a subscriber to your magazine and haven't seen guidance there either. Help would be appreciated.
POSTED BY: Mary Beth Franklin (December 06, 2007 10:11 AM)
Go ahead and make your charitable contributions for 2007. It's one of the few deductions that is allowed under the AMT.
POSTED BY: Mary Beth Franklin (December 06, 2007 10:27 AM)
Thanks for your comments. The Senate, which failed earlier this week to reach agreement an an AMT patch year, will try again today. Time is running short for the IRS to print forms and reprogram computers for the new tax filing season and that could delay processing of tax returns for all taxpayers--not just those who pay the AMT.
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