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

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