Is it OK not to claim Schedule A deduction?

[solomon]

IRS stumped? I emailed a question (a week ago) regarding this topic of selective deductions on Sch A and finally got a response today. Response is that because of the nature of the question more time will be required for an answer. Will post it when it arrives.

BTW, I also requested Sch C as well as an authoritative cite for both answers.

[OtisMozzetti]

Yes, a seesaw, but a wobbly seesaw...

Once you are in AMT, there is a seesaw effect between regular tax and AMT. Decrease taxes paid or misc deductions and AMT decreases, but regular tax increases by the same amount.

Approximately, yes. Yet there is a TAX TABLE lurking if taxable income amounts are less than $100,000 both with regular tax and with AMT. So, because of the way that the tax table brackets are laid out, changes in the amount of taxes deducted or in the amount of miscellaneous deductions can change the amount of total tax.

Also, if the deduction for state income tax were to be limited to the amount of state income tax liability, then at least as far as regular tax is concerned the tax benefit rule would make any refund of excess state income tax paid not taxable, nor part of the AGI, during the following year. Almost everyone realizes that holding down the AGI often has tax benefits in and of itself (but those are tax benefits occuring during a different tax year).

The tax benefit rule does, though, have to be applied to the total tax including AGI, not just to the regular tax alone.

[joanmcq]

Once you are in AMT, there is a seesaw effect between regular tax and AMT. Decrease taxes paid or misc deductions and AMT decreases, but regular tax increases by the same amount. I suggest doing planning in December...should he postpone payments until January as suggested in an earlier post or take them in this year? Once you are on the AMT seesaw its hard to get off, unless you decrease deductions drastically (but usually regular tax increases by more than the amt decreases if you get out of AMT) or your income goes up so far you are no longer subject to AMT. But there is no sense in throwing estimated tax payments or RE taxes into a year in which you get no tax benefit.

[Bees Knees]

I’m not suggesting that this is a reason for not having to deduct all itemized deductions, but when IRS files a tax return for a non-filer, they choose Married Filing Separate and give you the standard deduction.

Seems rather hypocritical for IRS to do that to a non-filer, but then require you claim all itemized deductions when someone files their own return.

I don’t think there is any consistency or principle that can apply to all deductions. There are specific rules that say you have to take all possible deductions when it comes to EIC, and self employment tax, as mentioned before. However, court case citations can only apply to the specific set of facts presented in the case. Unless someone comes up with a court case citation or regulation that specifically mentions you are required to deduct ALL taxes paid if you itemize, I would tend to agree the taxpayer has the option to pick and choose which deductions to claim on Schedule A, if any.

[JG EA]

Myers, will she get a 1099-G (State income tax refund) from California anyway, whether you elect to deduct the 12K or not?

If she gets one, my experience has been IRS will calculate an amount due based on having to claim the 12K as income. I'm not maintaining that you can't win on this, but perhaps only after letters and explanations...

I have never seen any inquiry from the IRS on this. Perhaps it happens randomly, but in their own instructions for Line 10:

Enter the income tax refund from Form(s) 1099-G (or similar statement). But do not enter more than the amount of your state and local income taxes shown on your 2006 Schedule A, line 5 . . . . . . . .

[JohnH]

Doug:

That's really neat     
                      and    
                              very useful information

Thanks for showing us how it's done.

[dtlee]

How did you post that information with the scroll box?

I think you were referring to the lists of items which don't all run together....

I have found that the best way to defeat that is to use bbcode tokens for code (i.e., programming code) to keep the text from being run together. You do this by proceding the text with square brackets around the word "code" and then the following the text with a square brackets around the command "/code"

Anything between the two commands retains its format and is displayed in courier.

The example below isi approximately what it would look like. I have extra spaces in the brackets that you would need to omit.

[ CODE ]Text you want to keep     formatted[ /CODE ]

would display as:

Text you want to keep    formatted

with the code commands surrounding it. even though it would normally display as follows:

      Text you want to keep formatted

[Zee]

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:


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.

How did you post that information with the scroll box?

[myerstaxes]

I will do

a calculation next year based on whether or not she got a benefit of the deduction for the $12K, my software asks what the deduction for taxes was on the prior year return and will calculate the benefit based on what was claimed vs what the refund was...I have seen it work with other clients so that only the portion of the refund that did result in a benefit will be added as income for 2008...
It all hinges on the tax benefit doctrine...

[Snaggletooth]

1099-g

Myers, will she get a 1099-G (State income tax refund) from California anyway, whether you elect to deduct the 12K or not?

If she gets one, my experience has been IRS will calculate an amount due based on having to claim the 12K as income. I'm not maintaining that you can't win on this, but perhaps only after letters and explanations...

[myerstaxes]

Here in CA

there is withholding when you sell real estate...I had a client who did not call me when she sold her rental and the State withheld $12K from her proceeds...There is a form to fill out if you think there will be no substantial gain to be reported from the sale, and had she contacted me, I could have saved her that $12K withholding...Anyway, what she did not know is that she would be due a Sec 121 exclusion since she had lived in this property more than 2 out of the last five years and the gain turned out only to be to the extent of depreciation previously taken...
Long story short, she got all of the $12K refunded, and I did not claim this State withholding on Schedule A, only their W2 state taxes...This $12K would have been a lot of $$'s to claim as income in the next year...No AMT was involved even if I had claimed it...I felt it was the prudent thing to do...As it never should have been withheld in the first place had she contacted me...The increase in Fed refund was not that great, sooo not worth it to me...

[dtlee]

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.

One situation I have analyzed is where by not deducting the State and Local Income Taxes (and choosing the lower Sales Tax deduction), any refund you might receive of State Income Tax is thus nontaxable. This avoids any impact on AGI in the next tax year. On another board I posted several examples of scenarios where avoiding the taxable refund could result in a significantly lower tax across the two years. This is especially true if the net deduction minus the refund is comparable to the total allowable State Sales Tax deduction.

[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.

[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?

[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.