AMT Taxes

[Corduroy Frog]

With Sch A taxes rolling forward into the AMT, the question may arise whether the taxpayer should even bother to report these taxes
as a deduction to begin with. In particular are state income taxes, which are removed on the AMT, but which may spawn 1099-G in the succeeding year for taxable state tax refunds..

What about the "erosion" of itemized deductions at high income levels, where a schedule A calculates a deduction for something LESS than the total of otherwise deductible items? Is the add-back to AMT "eroded" as well, or does it get added dollar-for-dollar.

Does the taxpayer have a right to REFUSE reporting some deductions?

[Roland Slugg]

Yes, taxes that are deducted on Schedule A do get added back on F-6251. However, if a taxpayer's state tax deduction was reduced or eliminated by the AMT, then some or all of his state tax refund will be non-taxable the following year when it is received. (Code §111(a))

Taxes deducted on Schedule A are added back in full on F-6251, even if itemized deductions were reduced by the 3%/80% limitation. However, the amount of itemized deductions lost by the 3%/80% limitation are subtracted when calculating AMTI on F-6251.

No taxpayer is required to deduct all his allowable itemized deductions.

[Gary2]

Keep in mind that the 1099-G may be issued regardless.

Also, if you do claim the taxes on Sch. A, but don't get the full benefit due to the 6251, then the next year when you figure out how much, if any, of the refund is taxable, you apply the tax benefit rule. So it's not like claiming the unhelpful tax deduction will cause an increase in taxable income the following year.

[appelman]

Don't forget state return!

Taxes other than state income tax, as will as miscellaneous itemized deductions, are deductible on the state return, so you will want to conform the two.

[mastertaxguy]

Amt-failure to take all deductions---

Yes, taxes that are deducted on Schedule A do get added back on F-6251. However, if a taxpayer's state tax deduction was reduced or eliminated by the AMT, then some or all of his state tax refund will be non-taxable the following year when it is received. (Code §111(a))....
No taxpayer is required to deduct all his allowable itemized deductions.

With all due respect to poster Slugg, one might want to review Qureshi v US, a federal Court of Claims case (8-31-2005), where IRS assessed AMT as a result of "adjusting" the taxpayer's return to include state//local income taxes NOT claimed by the taxpayer on his original return. As a result, the Service's determination of additional tax due resulting from AMT was upheld. It appears to me that IF the taxpayer is itemizing, they must itemize everything allowed to them (assuming they have or could obtain the apporpriate documentation). Those who attended AES seminars in 2005 and 2006 will find (as I recall) references to this case.

Remember: IRC Sec. 63 provides (definintion of taxable income):

Except as provided in subsection (b), for purposes of this subtitle, the term "taxable income" means gross income minus the deductions allowed by this chapter (other than the standard deduction).

Recall that IRC Sec. 1402 has a similiar provision as to self employment income computations:
"The term "net earnings from self-employment" means the gross income derived by an individual from any trade or business carried on by such individual, less the deductions allowed by this subtitle which are attributable to such trade or business"

[This provision was added in the 1950's as part of the 1954 code to discourage/prevent self employed individuals from inflating their SE income so as to obtain social security earning credits.]

[Golden Rocket]

What Additional Taxes

Mastertaxguy - good response as to how the IRS feels about leaving off taxes from Schedule A.

My question, however, is based on the above responses that allow taxpayers to wiggle out from the unfair ceilings
on the AMT.

If they can bail out of the erosion of itemized deductions, and they can bail out of state tax refunds, then how was the
IRS able to "assess and collect additional taxes" which resulted?

[Roland Slugg]

The Qureshi case has been discussed on this forum before, and the AMT portion of that case is a trivial issue based on a lack of understanding by Ms. Qureshi regarding how the AMT and the calculation of AMTI works.

The AMT is based on AMTI, and AMTI, in turn, starts with the taxable income reported on the return. To that amount are added back (or in some cases subtracted out) the various AMT adjustments and tax preferences to arrive at AMTI. One of those add-backs is the amount of state and local taxes actually deducted on the return ... on Schedule A. If a person chooses not to deduct a tax for regular tax purposes, it won't make any difference if he is subject to the AMT. If he had deducted it, his taxable income and, thus, his regular/income tax would have been less, but then the AMT preference added back would have been greater by that same additional amount resulting in exactly the same AMTI and the same total tax ... regular tax plus AMT. Q.E.D.

When it comes to itemized deductions, there is no "allowed or allowable" rule, like there is regarding depreciation. No taxpayer is required to deduct all his allowable itemized deductions ... and if he is subject to the AMT, it doesn't matter if he deducts them or not, because it doesn't make any difference.