Forcing Itemized Deductions Can Reduce the Alternative Minimum Tax

Posted by Lee Reams Sr. on

For Alternative Minimum Tax (AMT) purposes, only medical costs (net after the AGI reduction), acquisition debt interest, investment interest, charitable deductions, personal casualty losses, and tier-1 miscellaneous deductions are deductible. In addition, for AMT purposes, the standard deduction is not allowed.

In TCM 2003-23 D.M. Marx, the Tax Court ruled that the taxpayer couldn’t take the standard deduction for regular tax purposes and also itemize for the AMT. Thus, the same deductions must be used for both computations. This creates a dilemma for those who don’t have enough deductions to itemize for regular tax purposes but who do have substantial itemized deductions that can be used to offset the AMT.

Strategy - Taxpayers can elect to itemize - even if the itemized deductions are less than the standard deduction. Schedule A has a specific box to check if this election is being made. On the 2015 form, this is line 30. Forcing itemized deductions increases the regular tax but reduces the AMT tax. This presents a complicated moving target for the tax practitioner.

Ideally, the itemized deductions make the regular tax and the tentative AMT the same, thereby bringing the AMT add-on tax to zero. This can be accomplished by trial and error on your tax program; alternatively, those with good algebra skills can calculate the ideal amount by keeping in mind that the AMT decreases at 26% or 28% while the regular tax increases at the taxpayer’s marginal rate.

Bottom line - Utilizing this strategy may save a considerable amount of money for taxpayers who are subject to the AMT but whose itemized deductions are somewhat less than the standard allowance.