From a reader:

Subject: Re: ACAT's Year End Tax Tips

 

First, thank you for all the help & information you give your readers throughout the year. The links to new tax changes & rates are especially

helpful.

 

Here's a counter-intuitive tax tip for individuals:

We often hear or read tax advice near the end of the year telling us to pay deductible items by Dec. 31st to cut our current year's tax bill. Many of us may be tempted to reach for our check books, but for those in AMT territory because of an unusual income item such as a large capital gain, this can be the wrong advice. Paying before year's end the final state estimated tax installment &/or property taxes which are not due until the following year in order to increase itemized deduction may be the wrong strategy. The tax benefit of those early payments is mostly wasted as the AMT may disallow large chunks of certain deductible items. By waiting to pay them on their normal due date when AMT is not expected to be a factor, the full value of those tax deductible items can be realized.

My Reply:

You are correct that more and more people each year are being ensnared by the insane AMT and literally penalized for having too many itemized deductions.  Since the AMT thresholds haven't been adjusted for inflation, this is only going to get worse.

As Joe Kristan covered in his blog recently, year end tax planning does need to cover AMT issues, or else what seemed like a good idea at the time (prepaying state income taxes), could become an expensive waste of a deduction.

Thanks for writing.

Kerry Kerstetter

Follow-Up:

Thanks for the quick reply. Glad that Joe Kristan pointed out the links to the draft 6251 forms & instructions that you supplied. One daily surfing stop I make is to the irs draft tax form site where the latest gems from the IRS are posted for download.

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 12/07/2006 12:23:00 PM Send this post: