More Alternatives in the Complex World of the Alternative Minimum Tax: The Election to Itemize Deductions

Practical Tax Lawyer, Winter 2004

8 Pages Posted: 11 Dec 2003

See all articles by Francine J. Lipman

Francine J. Lipman

University of Nevada, Las Vegas - William S. Boyd School of Law

Nathan Oestreich

San Diego State University - College of Business Administration

James E. Williamson

San Diego State University - College of Business Administration

Abstract

As a general rule, when the standard deduction is greater than a taxpayer's itemized deductions, claiming the larger standard deduction for regular income tax purposes will generate a lower tax liability. However, if the taxpayer is subject to the alternative minimum tax (AMT) the decision to take the standard deduction in lieu of itemizing her deductions could cost unnecessary tax dollars. An additional set of calculations is necessary to determine the most tax favorable alternative under the AMT. The additional calculations answer the question of whether the taxpayer's tax liability would be reduced by electing to itemize her deduction even though the total is less than the standard deduction. Tax professionals must include this additional analysis in their AMT planning strategies or risk imposing unnecessary tax dollars on their clients.

Congress could resolve this obscure issue by amending the AMT provisions to ensure that the tax-minimizing alternative would be practically automatic. Both the government and the growing number of AMT taxpayers would benefit from reducing the number of alternatives requiring numerous obscure tax calculations, burdensome tax compliance and administrative complexity. The most favorable tax alternative should be the same under the regular income tax and the AMT systems. A recent projection estimates that by 2010, the AMT will affect thirty-three million taxpayers or one-third of all taxpayers. Much of this increase is in middle class households with income levels of less than $100,000. This group of taxpayers will then account for more than fifty percent of AMT taxpayers compared to less than ten percent today. As a result, all taxpayers must include AMT issues in their routine tax planning decisions. Simplifying AMT calculations to make the tax and tax elections more transparent would help to ensure that no one pays more tax than the law requires.

Keywords: Alternative minimum tax, standard deduction, election to itemize deductions

JEL Classification: K34

Suggested Citation

Lipman, Francine J. and Oestreich, Nathan and Williamson, James E., More Alternatives in the Complex World of the Alternative Minimum Tax: The Election to Itemize Deductions. Practical Tax Lawyer, Winter 2004. Available at SSRN: https://ssrn.com/abstract=475221

Francine J. Lipman (Contact Author)

University of Nevada, Las Vegas - William S. Boyd School of Law ( email )

4505 South Maryland Parkway
Box 451003
Las Vegas, NV 89154
United States

Nathan Oestreich

San Diego State University - College of Business Administration ( email )

5500 Campanile Drive
School of Accountancy
San Diego, CA 92182-8230
United States
(619) 594-2478 (Phone)

James E. Williamson

San Diego State University - College of Business Administration ( email )

School of Accountancy
San Diego, CA 92182-8230
United States
619-594-6021 (Phone)

HOME PAGE: http://www.sdsu.edu

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