Tax Avoidance Strategies Needed to Use Tax Deductions Effectively

As a careful tax payer, you most likely maintain good records so you could make the most of itemized deductions when you or your accountant completes your tax return. Did you realize though, that the tax avoidance strategy to optimize deductions may expose you to an entirely different group of guidelines that may result in extra taxes?

The alternative minimum tax (AMT) is a tax that may become more than the normal income tax. Congress's logic for the AMT was to prevent individuals with high incomes from using particular tax avoidance strategies and therefore paying little or no tax whatsoever. However, increasingly more taxpayers are finding themselves subject to the AMT, although they do not have extremely high incomes or use many special tax benefits.

The AMT has its own guidelines that aren't as generous as the normal guidelines to determine how much a person ought to pay. If you are having to pay at least that amount, you do not need to worry regarding the AMT. However, if your regular income tax is below the AMT, you'll need to pay the extra tax.

The Taxpayer Advocate Service, an independent organization within the IRS, reported the AMT has effects on substantial numbers of middle-income taxpayers and will, absent a change of law, impact over 30 million tax payers by 2012. Inflation is a big cause more and more people may be hit with the AMT since the threshold for AMT does not move automatically with inflation unlike the rest of the tax regulations.

Especially exposed are those with incomes between $100,000 and $500,000. Nevertheless, don't think that simply because your income is less, you will not have a problem. In the coming years, the share is expected to extend the most for tax payers with incomes between $50,000 and $100,000. Those not accustomed to using tax avoidance strategies to minimize taxes will need to pay attention.

There are a variety of items that cause you to have an AMT liability. These consist of:

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

Intelligent tax avoidance strategies are the key to making sure that you pay no more than necessary, whether you are subject to the standard rules or AMT rules. For example, you might find that you might need to pay the AMT in some years but not others. 1 tax avoidance strategy will be to 'bunch' a few of these deductions, like miscellaneous itemized deductions and health-related costs, in non-AMT years, because they will not be of great benefit in years in which AMT applies. I solidly recommend all investors seek the advice of with their own certified tax advisor prior to making any investment decisions.