Transcripts

"Kevin McCormally's Tax Tips"-Alternative Minimum Tax

SUSIE GHARIB: Just over three weeks to go now until the deadline for filing your Federal income tax return. So to help your filing efforts, every Monday night we're back with our annual tax tips series. Kevin McCormally, executive director of Kiplinger's personal finance, is our tax expert. Tonight, getting around the alternative minimum tax.

KEVIN MCCORMALLY, EDITORIAL DIR., "KIPLINGER'S PERSONAL FINANCE": I got a question the other day from a NIGHTLY BUSINESS REPORT viewer wondering if she'd come up with a clever way around the alternative minimum tax. She knew the one thing that could trigger the AMT is a fat state income tax deduction. Could she simply not claim all of her state income tax if that would save her from being tossed into the notorious nether world of the alternative minimum tax?

Believe it or not, the IRS recently took a taxpayer to court for trying to do just that, to avoid the AMT by not claiming all of her legitimate tax breaks and the IRS won. A Federal court said that the alternative minimum tax is figured the same way whether or not a taxpayer takes advantage of all the deductions on the regular tax return.

But here's the most interesting thing about that case. Imposing the AMT did not add one dime to what the taxpayer owed the IRS and that brings us to a critical issue for the viewer who asked the question and for all of you. Remember this. You only pay the AMT when it's more than your regular income tax liability. So if you avoid the AMT by increasing your regular tax bill by skipping itemized deductions or exemptions for your kids, for example, you're not doing yourself any favor. In fact you're shooting yourself in the foot. The IRS is still going to collect the same amount or maybe more. Now in some cases involving certain tax credits that are allowed under the regular rules but wiped out by the AMT, skipping your regular tax break to avoid the AMT might seem to save some money, but don't think you can come out ahead by forfeiting itemized deductions. I'm Kevin McCormally.