Calculation of the Alternative Minimum Tax (AMT) - Property Taxes
Property tax assessment and billing cycles vary among the states, but the basic concept of your control over paying a tax bill in December or in January - as we previously discussed regarding state income taxes - also applies to property taxes.
Real estate taxes
As an example, here is a sample of an actual property tax bill on a $500,000 residence in a state that assesses the tax in the fall, and then gives the taxpayer a choice of payment dates in accordance with a set schedule. With this example we can see how easy it is to have a direct impact on the Alternative Minimum Tax (AMT) you pay.
Assessed value ........................ $500,000
Total Property Tax Rate .......... 1.0724%
Property Tax Amount Due ........... $5,362
Due Date ................................. 12/31/10
Payment schedule as shown on the actual bill:
- If paid by 10/31/10, the tax amount due is $5,255 because of a 2% discount.
- If paid by 12/31/10, the tax amount due is $5,362 because of a 0% discount.
- If paid by 1/31/11, the tax amount due is $5,630 because of a 5% penalty.
- If paid after 1/31/11, the tax amount due is $6,488 because of a 21% penalty.
The Alternative Minimum Tax (AMT) saving strategy for property taxes is extremely simple here, since you have a choice of paying your property taxes in 2010 or in January, 2011. The simple act of when you write out the check will have a direct impact on the AMT you will pay. As mentioned above, you get no benefit from a property tax deduction in a year you are in the Alternative Minimum Tax (AMT). By paying your property taxes paid in a year you are not in the Alternative Minimum Tax (AMT), you will achieve real tax savings.
In this example, if you are in the Alternative Minimum Tax (AMT) this year but do not expect to be in the Alternative Minimum Tax (AMT) in 2011, by waiting until January to pay this bill you will save up to 35% in Federal income taxes (39.6% if the "Bush tax cuts" are allowed to expire). This obviously is much greater than the 2% discount you will forego and the 5% penalty you will incur.
Each individual reader's state assessment and billing cycle will vary from this example, but the concept is the same - to the extent you can, without incurring penalties with which you would not be comfortable, control even a portion of the timing of payment of your property taxes, you can save on your Alternative Minimum Tax (AMT) bill.
Personal property taxes
Many states impose taxes on the value of personal property that is owned. Common examples are automobiles, boats, RVs and the like. Similar to real estate taxes, personal property taxes are deductible for the Regular Tax but not for the Alternative Minimum Tax, so here is one more planning opportunity.
Assume your personal property tax rate is 1.5%, for example, and you have a $40,000 car. Your tax will be $600. If you have the opportunity to pay this in one year versus another (the December - January example above), this could be an easy way to shave a few hundred dollars off your Alternative Minimum Tax (AMT) bill.
Property taxes represent one of the easiest AMT planning opportunities. It is not hard to take a quick look at last year's property tax bills to see when they were received and when they are payable. A little advance planning right now potentially can save thousands in taxes if the Alternative Minimum Tax (AMT) is taken into consideration when paying these bills.