Are deductions phased out for AMT when income is high?

September 26, 2008

From:  Bruce
Date:  19 May 2008

I am under the impression that home mortgages and charitable deductions are still deductible under the alternative minimum tax (AMT). Most AMT articles discuss the low end trigger, but what if you are on the upper side of the AMT? What happens when income is above $500,000? Is the mortgage and/or charitable deduction still working in your favor or is it eliminated also? Can I buy a better house, or am I stuck?

In states like California where the taxes are high and cost of living is high, the penalty is already painful. Is the high income earner totally cut out of the deductions under the AMT?

Answer

Date:  04 Jun 2008

Hello Bruce,

I suggest that you download a copy of Form 6251, (the AMT form) and instructions from the IRS web site, www.irs.gov. The deduction for mortgage interest is similar for AMT reporting as for regular tax reporting, except interest expense relating to up to $100,000 of mortgage for which the proceeds were not used for acquiring or substantially improving a principal residence or a second residence may be deductible for the regular tax but not the alternative minimum tax. There is no AMT adjustment for charitable contributions, except possibly for some basis adjustments.

The phase out of itemized deductions based on adjusted gross income that applies for computing the regular tax does not apply when computing the alternative minimum tax. The phase out is restored at line 6 of Form 6251. Remember, when the regular tax exceeds the alternative minimum tax, you pay the regular tax.

In California, many high-income taxpayers are subject to the alternative minimum tax because the deductions for state income taxes, property taxes, and miscellaneous itemized deductions are disallowed when computing the alternative minimum tax.

Good luck!
Mike Gray

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