Is it OK not to claim Schedule A deduction?

[OtisMozzetti]

I have a client who figures that capital gains rates may go up by 5% of the amount of the gain, or even more, under the next U.S. president. Therefore that client has already sold large amounts of stock at a long-term gain, and will lose the alt. min. tax exemption, and therefore will be very much subject to the alt. min. tax.

The only possible Schedule A deductions will be lots of state income taxes, some property tax, and a small tax on vehicles, plus a moderate amount (less than the standard deduction amount) of well-documented charitable contribution. The ordinary taxable income, both for regular tax and for alt. min. tax purposes, will fall into one of the lower two tax brackets where tax is computed with the tax table.

Is it an acceptable procedure if the client wishes to itemize deductions, and just leave off claiming any deduction for the taxes paid?

[solomon]

Personally, I will not do that. It is analogous, IMHO, to foreign income exclusion. One can choose to exclude or not exclude but it is all or nothing. Also, comparable to picking and choosing on a Sch C to increase EIC.

[OtisMozzetti]

EIC really isn't the same thing

The EITC really isn't the same question. In that case, the amount of earned income needs to be accurately stated so that the credit will be accurate.

[solomon]

Irc 63

"(b) Individuals who do not itemize their deductions

In the case of an individual who does not elect to itemize his
deductions for the taxable year, for purposes of this subtitle, the term
``taxable income'' means adjusted gross income, minus--
(1) the standard deduction, and
(2) the deduction for personal exemptions provided in section
151."

Note: "does not elect to itemize" - not pick and choose.

[ChEAr$]

Are you saying

then, that IF one elects to itemize, he MUST take all allowable deductions?

I don't think so. Schedule a deductions are allowed by the grace of congress,
and many a time, at least on state schedule a's, I've eliminated just enough
to create a certain bottom line tax for client convenience.

Oh boy; I can imagine what this will cause.

[solomon]

then, that IF one elects to itemize, he MUST take all allowable deductions?

I don't think so. Schedule a deductions are allowed by the grace of congress,
and many a time, at least on state schedule a's, I've eliminated just enough
to create a certain bottom line tax for client convenience.

Oh boy; I can imagine what this will cause.

James Maule agrees with you - other than self employment and EIC. Some do not.

http://law.bepress.com/cgi/viewcontent.cgi?article=1058&context=villanovalwps

[New York Enrolled Agent]

Solomon

I think the IRS would agree with your earlier post regarding "picking & choosing" when it comes to AMT. One case which appears relevant and the taxpayer lost is from the Court of Federal Claims Qureshi 96 AFTR 2nd 2005-5949, affirmed on Appeal to The Federal Circuit Court of Appeals 98 AFTR 2d 2006-6473

[solomon]

Solomon

I think the IRS would agree with your earlier post regarding "picking & choosing" when it comes to AMT. One case which appears relevant and the taxpayer lost is from the Court of Federal Claims Qureshi 96 AFTR 2nd 2005-5949, affirmed on Appeal to The Federal Circuit Court of Appeals 98 AFTR 2d 2006-6473

Thank you for the cite, NYEA. I needed that.

[OtisMozzetti]

Article from Prof. Maule concludes deductions optional

The article cited above by Professor Maule supports, in much detail, the view that deductions are generally optional. From the summary, at the beginning of the article: "What little authority exists suggests that deductions are optional, except in two specific instances related to computation of net self-employment income."

[Kram BergGold]

You are missing the big picture

When you are subject to AMT you want to itemize. If you have any charity or interest deductions you will pay less tax by itemizing. Remember, the standard deduction is not allowed for AMT.

[Snaggletooth]

AMT purpose

The original purpose of the AMT was to restore a modicum of taxation to taxpayers who used certain deductions to reduce their tax to a level deemed to be too low by its founders, circa 1970.

38 years later, if taxpayers are NOT using these deductions to begin with, then how can AMT supporters complain??

The issue of intentionally refusing to take tax deductions would not be an issue at all if the rules did not create problems such as this AMT, EIC, SE tax, and the like.

[dtlee]

Solomon

I think the IRS would agree with your earlier post regarding "picking & choosing" when it comes to AMT. One case which appears relevant and the taxpayer lost is from the Court of Federal Claims Qureshi 96 AFTR 2nd 2005-5949, affirmed on Appeal to The Federal Circuit Court of Appeals 98 AFTR 2d 2006-6473

I do not presume to know more than NY Enrolled Agent or Solomon, but I am leaning to supporting the Maule article after reading this citation and that article. The inclusion or exclusion of state and local income tax really has no impact on the actual AMT Liability (known as the Tentative Minimum Tax) in the case cited.

The tax return was selected for examination due to large amounts of Education Expenses claimed. The taxpayer felt that once the Education Expenses were documented there should be no further change to the return. The taxpayer argued that this case was related to hie Education expenses and that the IRS should not have included the Alternative Minimum Tax calculation as part of their computation because that was not what the examination was about. Further, the taxpayer claimed that he properly excluded certain state and local income taxes from the total itemized deductions, so there would be no liability for the Alternative Minimum Tax. In other words, the taxpayer decided that the exclusion of State and Local Income Taxes removed him from being subject to the AMT. This is quite an oversimplification of the AMT rules and totally wrong in this situation.

In the decision, though, the court used the following phrase:

Plaintiff, however, misperceives the automatic application of the Alternative Minimum Tax when certain statutory factors are established.

Since it does not clearly elaborate what that statement means, I am interpreting this as saying, that the AMT does apply in this situation (not necessarily due to the inclusion/exclusion of State and Local Taxes). In other words, the plaintiff is complaining but doesn't know what he is talking about.

From my perspective, the taxpayer submitted a defective tax return (are all of them?). He reported the following:

AGI		67490
Deductions	26681
Exemptions	3000
Taxable Income	37809
Liablity	6559
AMT Income	0
Tent Min Tax	0
AMT		0
Withholding	10303
Refund		3744

When the IRS examined the return, they determined that his Education Expenses were allowed. Then, they also included his state and local taxes and determined he was subject to the AMT. They recalculated the return including the State and Local Income Tax and the recalculation was as follows:

AGI		67490
Deductions	31839
Exemptions	3000
Taxable Income	32651
Liablity	5168
AMT Income	66400
Tent Min Tax	7969
AMT		2801
Withholding	10303
Refund		2334

However, had the taxpayer filed the return correctly initially, he would have had the same computed tax liability and refund as the IRS:

AGI		67490
Deductions	26681
Exemptions	3000
Taxable Income	37809
Liablity	6559
AMT Income	66400
Tent Min Tax	7969
AMT		1410
Withholding	10303
Refund		2334

Regardless of whether the State and Local Income tax was included, the resulting Alternate Minimum Taxable Income remains $66,400 and the Tentative Minimum Tax remains $7,969.

I don't doubt that NY Enrolled Agent and Solomon could be correct, but I am having trouble accepting this particular citation as supporting that perspective. I believe the decision was that the taxpayer is subject to the AMT (I agree) and that the IRS computation is correct. I do not believe it is saying that the IRS is offering the only correct way to compute the AMT. They did not discuss the computation of AMT as it would have been done in using the original deductions since that was not offered by the taxpayer.

[dtlee]

Kram BergGold is right

When you are subject to AMT you want to itemize. If you have any charity or interest deductions you will pay less tax by itemizing. Remember, the standard deduction is not allowed for AMT.

I agree....

There are a few ways to avoid being subject to the AMT, but not itemizing isn't the way to go. I always tell people that you need to look at two years to plan for the AMT. For example, it may make sense to not pay state estimates and have a big balance due since the deductions are limited by AMT in the current year, but may not be so limited in the next year. Paying them and not deducting them would not necessarily reduce the overall tax liability.

For example, in the Qureshi case cited, had the taxpayer omitted the itemized deductions (all of which were added back for AMT purposes), and filed using the standard deduction, the taxpayer would not have beeen subject to AMT, but would have increased the tax liability by over $4,500.

[Lion]

Amt

If you and your client expect AMT to be a factor for 2008, why not postpone some tax payments to 2009 when he's not selling stock? Pay his last ES 15 January 2009 instead of 31 December 2008; pay December's property tax 2 January, etc. If bunching deductions into next year means he'll be using the standard deduction this year, then make charity donations in 2009 for both 2008 and 2009 also. In other words, why fail to take deductions in 2008 and lose them? Why not move them to 2009 when they might do him some good if his income is lower with no/few stock sales?

[Roland Slugg]

I have never seen a situation where NOT taking a deduction to which the taxpayer was entitled produced a better tax outcome than deducting it. The worst that can happen is that the would-be deduction produces the same overall tax, due to the AMT.

However, as others have correctly pointed out above, it may be in a T/P's best interest to delay paying certain expenses ... normally state taxes, real estate taxes (on non-rental property), and/or personal property taxes until the following year if in the current year he will be subject to the AMT but in the subsequent year he will not. The only way to be sure is to do tax planning for both years.

Regarding the specific question asked in the original post, itemized deductions are permissive, not mandatory, so one never needs to deduct what may be a legitimate item if for some reason he chooses not to.