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Alternative Minimum Tax Part 3: Can I deduct anything?

by Rebecca K. Wohltman, Associate

Last time  I told you about some of the deductions that the Alternative Minimum Tax disallows or modifies. This time, I will share some of the deductions that you can still take even if you find yourself subject to the Alternative Minimum Tax.

The Alternative Minimum Tax allows taxpayers to deduct disaster losses, motor vehicles sales taxes, charitable contributions subject to regular tax limits (generally limited to 50% of adjusted gross income), qualified housing interest, investment interest to the extent of net investment income as calculated under the Alternative Minimum Tax, and other miscellaneous deductions not limited to the 2% floor.

While the traditional tax system allows a deduction for qualified residence interest, the Alternative Minimum Tax only allows a deduction for “qualified housing interest.” To be qualified for purposes of deducting the interest expense under the Alternative Minimum Tax, the interest must be due to the acquisition, construction, or substantial improvement of the taxpayer’s principal residence or a qualified dwelling, such as a house, apartment, condo, or mobile home. Whereas a taxpayer not subject to the Alternative Minimum Tax could deduct interest expense on a home equity loan used to finance a vehicle purchase or an education, a taxpayer subject to the Alternative Minimum Tax cannot deduct that interest expense. This restriction limits the appeal of the tax deduction benefit of home equity loans.

Some other miscellaneous itemized deductions not limited to the 2% of adjusted gross income floor, which are allowed under the Alternative Minimum Tax, include the amortizable premium on taxable bonds, casualty and theft losses, federal estate tax on income in respect of a decedent, impairment-related work expenses of persons with disabilities, losses from Ponzi-type investment schemes, and unrecovered investment in an annuity.

Although the Alternative Minimum Tax sharply limits the deductions available to a taxpayer, some deductions are still available. But because deductions are limited or disallowed, and thereby added back to the taxpayer’s income, a taxpayer’s Alternative Minimum Taxable Income may be significantly higher than when traditionally calculated.

Professional Services Disclaimer: Please note that the information presented here is as an educational service, and while it contains information about legal issues, it is not legal advice. No warranty is made regarding the applicability of the information presented to a particular client situation, and the information set forth is not a substitute for original legal research, analysis and drafting for a particular client situation.

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