Miss­ing Tur­boTax Tip Could Help AMT Fil­ers

The Washington Post Sunday - - Sunday Briefing - By Kath­leen Day

If you’re sub­ject to the al­ter­na­tive min­i­mum tax and us­ing In­tuit’s Tur­boTax to pre­pare this year’s re­turns, you might be miss­ing a break that could save you some money.

Last year’s ver­sion of the pop­u­lar tax prepa­ra­tion soft­ware alerted users hit by the AMT that they might be able to save money on their state re­turns if they took a de­duc­tion on their fed­eral re­turns for state sales tax.

This year, how­ever, the soft­ware left out the alert. The omis­sion was caught by Peter Sklarew, a tax at­tor­ney in the De­part­ment of Jus­tice. He stum­bled on it not in the line of duty, but as a rank- and- file tax­payer. He first learned about the break a year ago, while us­ing Tur­boTax to pre­pare his 2005 re­turn; last week he no­ticed the tip was gone.

Tur­boTax spokesman Bob Meighan con­firmed the tip was ac­ci­den­tally dropped from this year’s ver­sion. He said the omis­sion was the re­sult of Congress wait­ing un­til late De­cem­ber to ex­tend a rule al­low­ing tax­pay­ers to deduct state in­come or state sales tax ( but not both) on their fed­eral fil­ing. The com­pany scram­bled to add Congress’s last- minute changes to its soft­ware and be­lieves it added all but this one.

This break, of course, ap­plies only to those who must pay un­der the AMT and who live in a state that per­mits a state sales tax de- duc­tion on state re­turns. Lo­cally, Mary­land and Vir­ginia per­mit this de­duc­tion, but the Dis­trict does not.

An es­ti­mated 4.2 mil­lion tax­pay­ers will be af­fected by the AMT this year. Be­cause the AMT — which was in­tended to tar­get the rich — hasn’t been in­dexed for in­fla­tion, it in­creas­ingly hits the up­per mid­dle class.

Here’s how the sales- tax break works: Higher- in­come folks must tab­u­late taxes un­der the reg­u­lar sys­tem and un­der the AMT, pay­ing which­ever is more. If you pay un­der the reg­u­lar sys­tem, you should deduct your state in­come tax or sales tax, which­ever is larger, be­cause that will re­duce your fed­eral tax bill. If you pay un­der AMT, it doesn’t mat­ter which state tax you choose, be­cause that de­duc­tion won’t count in com­put­ing what you owe the fed­eral gov­ern­ment.

But for AMT fil­ers, the state tax that you choose in cal­cu­lat­ing your fed­eral taxes could make a dif­fer­ence on your state re­turn. States, of course, don’t al­low a de­duc­tion for state in­come tax; that can only be claimed on your fed­eral re­turn. But state sales tax de­duc­tions are per­mit­ted in some states, and that can re­duce your state tax bill, even if you pay the fed­eral AMT.

Tur­boTax users please note: The soft­ware won’t re­mind AMT pay­ers to use state sales tax when item­iz­ing on fed­eral re­turns. You’ll have to re­mem­ber to do it. And the soft­ware will au­to­mat­i­cally sub­tract your state in­come from de­duc­tions claimed on the state form, even if you didn’t deduct it fed­er­ally. You must over­ride the com­puter. Just delete the num­ber the com­puter puts in and type in “ zero,” Meighan says.

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