Tax Planning Needed to Get Big Tax Deductions

Like a diligent taxpayer (which you may or may not be), you would keep very good records which means you can make the most of itemized deductions whenever you or your accountant completes your tax return. But sometimes, the best practices at reducing taxes can end up costing you more taxes with the alternative minimum tax (AMT). Some minor tax planning can avoid the extra cost.

The Taxpayer Advocate Service, an autonomous organization within the IRS, noted that the AMT affects substantial numbers of middle-income taxpayers and will, absent a change of law, affect more than 30 million taxpayers by 2012. Inflation is a big cause as increasingly more individuals might be hit with the AMT because the threshold for AMT doesn't move automatically with inflation unlike the rest of the tax regulations.

The AMT is a tax that could be more than the regular income tax. Congress's logic for the AMT was to stop individuals with high incomes from utilizing special tax planning strategies and therefore having to pay minimum tax at all. Nevertheless, more and more tax payers are finding themselves subject to the AMT, even though they do not have extremely high incomes or use numerous exclusive tax benefits.

Especially exposed are those with incomes between $100,000 and $500,000. Nevertheless, do not think that just because your income is less, you will not have a problem. In the coming years, the share is expected to extend the most for taxpayers with incomes between $50,000 and $100,000. All those not comfortable with employing tax planning strategies to reduce taxes will require to pay attention.

The AMT has its own rules that are not as generous as the regular guidelines to find out just how much a person should pay. Should you have activities or specifically, large tax deductions, that trigger the AMT, you will pay extra tax.

There are a variety of things that could cause you to get an AMT liability. These consist of:

• Exemptions for a husband or wife and dependents
• Medical expense deductions
• State and local taxes, including residence and income taxes
• Interest on 2nd mortgages, except if the cash was used to purchase, construct, or improve the home
• Interest on house equity loans, unless the money was utilized for house improvements
• Miscellaneous itemized deductions
• Certain credits
• Capital gains
• Incentive stock options
• Tax-exempt interest from private-activity bonds
• Tax shelters

Here's an example. I had an especially good income year. I had not paid enough state income tax. The following year, I paid made up the state income tax deficiency and made all of my state income tax payments on time. As a result, I had very large state income tax deductions for that one year (essentially two years of payments in one year), found myself exposed to the AMT and paid extra tax. Had I planned ahead and made sure to spread out my state tax payments and not bunch them into one year, I could have avoided the AMT. Any of the above items on the list could affect you in a similar manner.

Smart tax planning strategies are the key to making sure that you pay no more tax than per your regular liability, whether you are subject to the conventional rules or AMT rules. For example, you may find that you might need to pay the AMT in some years but not others. One tax planning strategy would be to 'bunch' some of these deductions (when you KNOW you cannot avoid AMT), like various itemized deductions and medical expenses, in non-AMT years, since they won't be of great benefit in years in which AMT is applicable. I solidly recommend all investors seek the advice of with their own qualified tax expert in the MIDDLE of the year and not wait. until April of the next year when it's too late to take action.