The politics of the AMT, why a $4K state sales tax decution beats a $19K state income tax decution (Congress, wage)

[aneftp]

It's tax day, April 15th. My brother just completed his Turbo Tax (he and his wife are W2's) so turbo tax should be ok for them.

However, I just saved him around $1200 in taxes by one very easy maneuver. He lives in Maryland, one of the highest state income taxes in the country (he pays 5.75 state income tax plus 3.2% county income taxes for a grand total of 8.95% state income taxes).

I saw turbo tax opted to tell him to take the 19K state income tax deduction since it's larger than the $2K sales tax deduction he would qualify for. Plus since his AGI is over $250K, he could take advantage of the car sales tax deduction of 2009. He lost of a $2k sales tax deduction on his Honda Odyssey minivan (I didn't realize minivans cost that much).

Now here's where I get to the AMT (the alternative minimal tax). It's essentially a flat tax 26% of the first $175K (give or take) and 28% of income afterwards. Thank the Democrats for imposing this AMT (1969 law really meant to hit people making over $800K in today's money) and thank Willie Clinton for raising the flat AMT taxes from 24% to 26%/28%. Also you lose some major deduction such as your personal exemptions, your huge state income tax deduction, and your huge property tax deduction.

So with one little maneuver, I elected to have Turbo Tax take the $4K sales tax deduction (he gets $2K sales tax plus $2K car sales tax deduction). The reason he gets to claim the car sales tax deduction is there is no income limit on car sales tax deduction when claiming state sales deduction.

So with this little maneuver, I got him back $3300 in Maryland state income taxes. His federal taxes remain the same. Most importantly, I got him out of the AMT range.

Also here's a little extra. Since he claimed sales tax deduction and not state income tax deduction; next year when he gets a 1099G (for the $3300 on the Maryland refund), he won't have to re-add that $3300 back into his federal income wage (since he never claimed the state income tax refund). That over a $1000 real cash savings.

I'm not even an accountant but I've been involved in my business taxes for over 6 years. I know all the rules. I even have to correct my own accountant from time to time.

But this Alternative Minimal tax is just horrible. You don't have to resort to these maneuvers. And stupid computer programs can't catch everything to save you money. Congress needs to abolish the AMT. My brother would have been giving away $1300 back to the government if I didn't catch this.

[Jaggy001]

Originally Posted by aneftp

It's tax day, April 15th. My brother just completed his Turbo Tax (he and his wife are W2's) so turbo tax should be ok for them.

However, I just saved him around $1200 in taxes by one very easy maneuver. He lives in Maryland, one of the highest state income taxes in the country (he pays 5.75 state income tax plus 3.2% county income taxes for a grand total of 8.95% state income taxes).

I saw turbo tax opted to tell him to take the 19K state income tax deduction since it's larger than the $2K sales tax deduction he would qualify for. Plus since his AGI is over $250K, he could take advantage of the car sales tax deduction of 2009. He lost of a $2k sales tax deduction on his Honda Odyssey minivan (I didn't realize minivans cost that much).

Now here's where I get to the AMT (the alternative minimal tax). It's essentially a flat tax 26% of the first $175K (give or take) and 28% of income afterwards. Thank the Democrats for imposing this AMT (1969 law really meant to hit people making over $800K in today's money) and thank Willie Clinton for raising the flat AMT taxes from 24% to 26%/28%. Also you lose some major deduction such as your personal exemptions, your huge state income tax deduction, and your huge property tax deduction.

So with one little maneuver, I elected to have Turbo Tax take the $4K sales tax deduction (he gets $2K sales tax plus $2K car sales tax deduction). The reason he gets to claim the car sales tax deduction is there is no income limit on car sales tax deduction when claiming state sales deduction.

So with this little maneuver, I got him back $3300 in Maryland state income taxes. His federal taxes remain the same. Most importantly, I got him out of the AMT range.

Also here's a little extra. Since he claimed sales tax deduction and not state income tax deduction; next year when he gets a 1099G (for the $3300 on the Maryland refund), he won't have to re-add that $3300 back into his federal income wage (since he never claimed the state income tax refund). That over a $1000 real cash savings.

I'm not even an accountant but I've been involved in my business taxes for over 6 years. I know all the rules. I even have to correct my own accountant from time to time.

But this Alternative Minimal tax is just horrible. You don't have to resort to these maneuvers. And stupid computer programs can't catch everything to save you money. Congress needs to abolish the AMT. My brother would have been giving away $1300 back to the government if I didn't catch this.

Absolutely agree with you on the AMT A tax designed to make sure that very high earners do not "avoid" income tax now catches, disproportionately, quite a lot of middle class wage earners ..... the "HENRY" High Earner Not Rich Yet.

[aneftp]

Originally Posted by Jaggy001

Absolutely agree with you on the AMT A tax designed to make sure that very high earners do not "avoid" income tax now catches, disproportionately, quite a lot of middle class wage earners ..... the "HENRY" High Earner Not Rich Yet.

Glad we are in the same boat. Many people just don't realize that the AMT is a take on middle/upper middle class folks. Really with a 2 income family in the Washington DC area or any other high cost areas like NY, SF, LA, making $200K a year, while a good living to most is really just upper middle class. And these are the people getting hit with the AMT.

The only reason I avoided the AMT is because I moved down to Florida where there are no state income taxes to deduct. AMT is just becoming a huge cash cow for the government. They know. We all know it. That's why Congressional people talk tough about doing something about it (yearly patches) but there's no true talk about repealing it. If Obama and the current Congress were serious about not taxing the middle class, they would repeal the AMT. Most very wealthy people do not get hit with the AMT. That's because most of their income is already at the 35%, higher than the flate26/28% AMT tax. But the upper middle class lose those valuable deductions.

People won't care until it hits them. With inflation, most people will eventually get hit with the AMT over time.

It's a me me me world. As long as taxes don't affect me, I don't care attitude. But like the AMT, other taxes, like this new healthcare tax (on medicare taxes above 200K/250K) will hit more and more people.

People, please wake up. There a reason Congress did not index the new medicare tax "on the rich". The reason it's not indexed is because they really want to tax the middle class in 10-15 years when 200K won't be considered a high earner.