Home Ownership And The Alternative Minimum Tax

By Author: George Bauernfeind
Total Articles: 3
Comment this article

The Alternative Minimum Tax is an important consideration for taxpayers who own their homes as just about every tax rule applying to real estate is different for the AMT than it is for the Regular Tax. Because a home typically is a taxpayer's largest purchase, the differences in tax treatment between the Regular Tax and the AMT can be significant.

The largest expenses associated with home ownership are interest expense from the mortgage on the home, and the real estate taxes that must be paid.

Interest expense

Interest paid on a loan secured by a taxpayer's home, referred to in the tax law as "qualified residence interest," is deductible for purposes of the Regular Tax, subject to a couple of limitations. Interest on home acquisition debt is deductible in full to the extent the mortgage does not exceed $1 million, as is interest on home equity line of credit or second mortgage to the extent this debt does not exceed $100,000. This second mortgage debt can be used for any purpose – the purchase of a new car or to pay for college education is a typical example.

Under the Alternative Minimum Tax, ...
... a taxpayer is allowed a full deduction for interest on home acquisition debt. For second mortgage debt, however, it is AMT-deductible only if it is used to improve the residence. In other words, if it used for purposes such as the car loan or student loan mentioned above, it is not deductible for the AMT.

From a planning point of view, for AMT payers it is important when financing things like new cars and college education to remember this rule. If the interest on a second mortgage will not be deductible, it may be less expensive to finance the new car with a special low interest rate offer from the manufacturer, or to look to traditional student loan programs for those college tuition bills.

Property taxes

Property taxes are allowed in full for Regular Tax purposes, but, along with all other state and local taxes, are not allowed at all as a deduction for the Alternative Minimum Tax.

A tax savings idea here for an AMT payer to plan ahead and try to pay your property tax bill in a year that you are not in the AMT. Depending on levels of income, itemized deductions and other factors, taxpayers can find themselves in the AMT one year but not the next.

For example, assume that your property tax bill is mailed in October, and is payable under the following discount schedule: November - 4%, December - 3%, January - 2%, February - 1%. If you are in the AMT in 2012 but expect not to be in the AMT again in 2013, do not pay your bill in November or December. Forgoing that small discount could save a taxpayer up to 35% of the amount of the property taxes on his Federal income tax bill next year.

Conclusion

A little AMT planning can go a long way. Since mortgage interest expense and property taxes amount to large expenses for every homeowner, understanding the AMT limitations can present opportunities to save hundreds, or possibly even thousands, of dollars of taxes.

For more information about Alternative Minimum Tax Please visit http://www.amtindividual.com/