USA AMT income tax question
February 18, 2012 12:00 PM   Subscribe

USA federal income tax question relating to AMT and state income tax refunds. Very much a #firstworldproblems sort of thing.

My income is from practicing law, writing, and gambling. Nobody who gives me money withholds, so I make estimated payments.

Mistakenly expecting Congress to be rational and let the Bush tax cuts expire, I overpaid my state income taxes by about $3400 in 2010.

Unfortunately, this was too clever by half: that overpayment plus my charitable contributions and mortgage payments put me in AMT territory, so I didn't get to take deductions for my 2010 state-income tax payments.

But my tax software (H&R Block) is treating the refund of that overpayment as taxable income in 2011 though I didn't get to deduct it in 2010. I'd be out about $1000. This can't be right, can it? Or are American taxes even more punitive than I imagined? My Google-fu is failing me.
posted by commander_cool to Work & Money (3 answers total) 2 users marked this as a favorite
Response by poster: Wait, prepaying my state income taxes would make things worse if the tax cuts expired. So I don't know what stupid reason I came up with to overpay my state income taxes. I think it was just a last-minute payment hoping to avoid penalties. Anyway, the reasoning is irrelevant to the AMT question.

And to preempt complaints, yes, I'll ask H&R Block eventually, but I'm asking just in case I'm not the first person in the world this has happened to and someone has an answer at hand.
posted by commander_cool at 12:07 PM on February 18, 2012

IANAaccountant. This is not legal or financial advice. Consult your own professional(s). My experience is from being a SME working with a very popular business accounting software and having to hand out way too much accounting and tax advice.

Because no one has answered, let me give you the correct answer: Anyone who is running up close to having to pay the alternative minimum tax REALLY needs to see an accountant or tax professional. Do not do this on your own or with only tax software.

The fact that you are doing estimated payments, getting gambling income and getting freelance income means that you really should talk to an accountant to get things set up correctly. In reality, you may be better off running both the law and writing as businesses under a separate legal entity from yourself. There are going to be all sorts of liabilities that need to be considered for each of the three professions.

You could be up a proverbial creek and out $1000 or so in deductions to avoid getting reamed by the AMT. No one can really tell you without your full tax details, which I would not put up here. Get an accountant ASAP. They will be getting very busy right now, so the sooner the better (and I do mean Monday). The X hundreds of dollars will likely be well worth the investment, as a good accountant can get you set up to possibly pay even less in tax. The only way you will know is to get an accountant. Also: you may want to consider getting a lawyer of your own. While I realize you are a lawyer, you know as well as anyone that in many cases you do not want to represent yourself and this very well may be one of those cases.
posted by Mister Fabulous at 4:15 PM on February 18, 2012 [1 favorite]

Best answer: I spoke to a patent-lawyer friend who is similarly nerdy about tax optimization, and turns out he had the same issue last year. The answer is hidden in IRS Publication 525, pages 22-23 and 28-29. I don't have to count the refund as income if it didn't affect my taxes in the previous tax year, and since it didn't becaue of the AMT, I don't. But my tax software doesn't know this and doesn't know that it doesn't know this.

So, yeah, my taxes are starting to get too complicated for tax software unfortunately. I've refinanced my mortgage, and am doing a better job of keeping track of my state taxes, so I shouldn't hit the AMT for another few years.
posted by commander_cool at 4:52 AM on February 19, 2012

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