Tax Court Denies Challenge to the Alternative Minimum Tax, Revealing Costly AMT Taxpayer Errors

Once in a while a pissed off taxpayer will go to Tax Courtroom in an try to persuade a decide that the Different Minimal Tax was by no means meant to use to them. As within the case of Fritz v. Commissioner, nonetheless, no sympathy is ever discovered there – if the calculations are executed appropriately the Courtroom merely confirms that the tax is owed. The info in these circumstances current attention-grabbing classes, nonetheless, as a result of they reveal each the horrible feeling of frustration when getting blindsided by the AMT in addition to the easy, but missed, planning alternatives that might have allowed many of those of us to keep away from paying the AMT.

Information of the case

Mr. and Mrs. Fritz filed their tax return with out attaching Kind 6251, “Different Minimal Tax – People.” They promptly obtained a discover from the IRS informing them that they owed precisely $7,007 extra in AMT. The Fritz’s tax return was comparatively easy – $329,000 of whole revenue, the vast majority of which – $283,000 – was long-term capital acquire and qualifying dividends. The Fritzes took the usual deduction, apparently as a result of this was larger than their itemized deductions, in addition to the deduction for his or her private exemptions.

Different Minimal Tax drawback

Two AMT points brought about the Fritz’s Different Minimal Tax drawback.

Lack of the usual deduction and the deduction for private exemptions

As has been mentioned in lots of earlier articles, below the AMT the usual deduction is disallowed in whole, as are the deductions for private exemptions. Due to this, Different Minimal Taxable Revenue (AMTI) is all the time increased than Common Tax taxable revenue by these quantities. For 2011, the usual deduction for a married couple submitting collectively is $11,600, and every private exemption is $3,700. In a case just like the Fritzes, their AMTI for the present yr can be $19,000 increased.

Lack of the AMT Exemption because of the massive capital acquire

When a married couple’s AMTI exceeds $150,000 the AMT exemption begins to be phased out. The exemption quantity for 2011 is $74,450, however that is phased out on the fee of $1 of exemption for each $4 of AMTI in extra of $150,000. Within the Fritz’ state of affairs, they’d lose $44,672 permitting them an AMT exemption quantity of solely $29,778.

The Fritz’ argument

The argument made to the Tax Courtroom by the Fritzes was that capital positive factors and qualifying dividends needs to be taxed on the 15 % tax fee, as specified within the tax legislation for each the AMT in addition to for the Common Tax. By operation of the AMT calculations, they alleged, their efficient tax fee on this revenue really was increased than this.

The Tax Courtroom’s reply

The Tax Courtroom decide was direct in his response: “Petitioner’s place on this case misses the purpose. In actuality, the tax on the capital positive factors was restricted to fifteen % and the ‘extra tax’ was attributable to the elimination of preferences.” Judgment in favor of the IRS.

Planning alternatives the Fritzes missed

There are a number of issues the Fritzes might have executed to scale back, and sure get rid of, their Different Minimal Tax.

Itemizing deductions as a substitute of taking the usual deduction – If the Fritzes had house mortgage curiosity, or if they’d made any charitable contributions, they might have decreased their AMT by itemizing deductions as a substitute of taking the usual deduction. This, sadly, is a typical error for AMT payers. If they’d had, for instance, simply $1,000 in curiosity or contributions, they’d have immediately decreased their Different Minimal Tax by $280. They weren’t required to take the usual deduction; they did it as a result of it was bigger than their itemized deductions, and so they simply didn’t take into consideration the AMT.

Unfold the capital acquire over two or extra years – The timing of when to promote securities and understand capital positive factors is fully throughout the management of a taxpayer. Not spreading their very massive acquire of $246,000 over simply two years was a pricey mistake on the a part of the Fritzes. If they’d as a substitute acknowledged half of their capital acquire within the present yr and pushed the opposite half to the next yr, they’d have misplaced over $30,000 much less of their AMT exemption, almost definitely eradicating them fully from the AMT!

Conclusion

Because the Fritzes realized the onerous method, paying the Different Minimal Tax is a penalty that always might be averted with just a bit consciousness of the AMT. Had Mr. & Mrs. Fritz executed this, they’d have $7,000 extra of their checking account at the moment as a substitute of getting to place this quantity within the mail to the US Treasury. Lesson realized the onerous method!