Here’s a Quick AMT Planning Example

By: kinal | Posted: 08th June 2009

The most common item affecting folks paying the Alternative Minimum Tax is the deduction for state and local taxes. For regular tax purposes, you are allowed a deduction for state income taxes, city or other local income taxes, real estate taxes, personal property taxes, and certain other taxes paid during the year. When you prepare your Federal income tax return, you can elect to pay the state sales tax you paid in lieu of the state income tax you paid, which you would want to do if that gives you a larger deduction. This election works particularly well for those living in states with no income taxes. Florida is one such state, along with Texas, Alaska, Nevada, Wyoming, Washington and South Dakota. Two states tax only dividend and interest income, not wages, so this option could make sense in those states also.

Here are some basic facts we will use for this example: Assume you receive a $5,000 property tax bill in November. Your local tax office allows you to pay it any time before next March, with a 2 percent discount if paid in the current year. Therefore, it is entirely up to you whether you pay it in December (which would make it a deduction on this year's tax return) or in March (the deduction would be on next year's tax return). Also assume you are in the top tax brackets for both the regular tax and for the Alternative Minimum Tax (35% and 28%, respectively).

Because property taxes are not deductible at all for AMT purposes, this basic type of AMT tax planning can be very effective. Caution yourself against simply paying the bill early to get any discounts offered, which is an instinct many people have. The potential income tax benefit is worth a lot more than the discount.

Tax Planning Strategy:

1.No Tax Planning- Property Taxes (This year when you are not in AMT)
Property Taxes Owned(assumed no deduction phase-out) - $5000
AMT Tax Rate - 28 percent
Regular Tax Rate - N/A
Tax Cash Benefit - $0
Discount Cash Benefit - $100
Net Cash Savings to You From Implementing Strategy - NIL

2.Planning Strategy - Pay Property Taxes (Next year when you are not in the AMT)
Property Taxes Owned(assumed no deduction phase-out) - $5000
AMT Tax Rate - N/A
Regular Tax Rate - 35 percent
Tax Cash Benefit - $1750
Discount Cash Benefit - $0
Net Cash Savings to You From Implementing Strategy - $1650

The result is a very impressive tax savings of $1,650, simply by paying your bill one or two days later. For just a little time spent on tax planning, how's that for a return on investment? What would you do with that $1,650 in your bank account?


George Bauernfeind is with AMT Individual - providing information on alternative Minimum Tax Planning. He writes articles to help the tax payers to pay less Alternative Minimum Tax. He recommend to use Alternative Minimum Tax Calculator to reduce Alternative Minimum Tax.
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Tags: federal income tax, two states, tax purposes, local taxes, state income tax, interest income, income tax return, alternative minimum tax, tax rate, tax planning, real estate taxes, state income taxes