Deducting sales tax to reduce state income taxes

Edwards Finance > Loans

Q. I've seen the following idea bandied about. TaxCut even suggested it: Let's say you live in NY state. You're doing your federal return, and you're deciding if you want to deduct 15k of state & local income tax or 5k of state and local sales tax. Well, normally you'd deduct the income tax (since it's a greater number), but let's say that you're subject to the AMT. So the argument for deducting *sales* tax instead goes like this: 1. Since neither deduction matters for the AMT, switching from the income tax deduction to the sales tax deduction won't affect your federal income tax liability. So far, it's a wash... 2. Now when you do your state income taxes, you get to take into account your federal deductions. Had you deducted state income traxes on your federal form, you'd have to add them back in for your state form. But if you deducted sales tax instead, then (at least in certain states), you don't have to add them back in. Net result: Your *state* income taxes go down as a result of deducting your sales tax on your *federal* form. Am I understanding this right? The thing I don't get is step 1. Let's say I deduct the 5k of sales tax on my federal form instead of 15k of state income tax. Sure, this doesn't affect the AMT, but it could affect my "regular" federal income taxes. Won't my regular tax liability go up, possible to the point of making the AMT moot?

A. -What you are overlooking here is that AMT is NOT an add-on tax; it is actually a separate tax system. IRS discuises this by the way it handles the AMT on your return. What actually happens, though, is that, as you surmise, your regular tax go

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