Mortgages & AMT

AMT still allows you to deduct mortgage interest.

AMT does not allow you to deduct all of your mortgage interest if doing so would place you below the AMT threshold. So if, per AMT, you have to pay at least X amount of tax, if your mortgage deduction would take you below that amount, the AMT kicks in to make up the difference. This has happened to my husband and me for the past 2 years. Slate and CNN have pretty good articles (and accurate, from our experience!) explaining how this works.

I cannot believe that more Americans aren't rallying against AMT. Does anyone know of good blogs for this??

Re #3 -- You can still take your full mortgage interests deduction (up to $1 million in principal amount of mortgage) even if you fall under AMT. AMT does phase out mortgage interest deduction on home equity loans though.

#5 is correct. I had run pro-forma calculations on Turbo Tax and the two things which AMT does not significantly affect are mortgage deductions and charitable contributions.

AMT also negates cash out portion of refinanced mortgages. The AMT is an evil stepchild of the liberal democrats who think that 200,000 a year is a lot of money.

Listen to #3 and me because we have both been hit with AMT with mortgage deductions for the past few years. Do all the calcs you want on Turbo tax but unless you have actually been hit with AMT it is not something that you can easily quantify.

The spirit of what #3 said was correct but the wording makes it sound like mortgage intrerest is not permissible or is only partially permissible under AMT. In fact the whole $1M is permissible but if you have the magic combination of state, city and itemized deductions then AMT kicks in and your taxes have to be recalculated with a diff formula. When this is done, it does not matter what is permissible or not under AMT because the flat rate that is applied to the much larger AGI that it is calculated against can be big enough to negate the effect of deducting the mortgage interest to come up with that AGI in the first place.

Does that make sense? If you are under the AMT threshold you can deduct more items and get a lower AGI so you reduce your tax liability. The mortgage interest is a big deduction so you get a big effect on your tax liability. Once you go over, you get to deduct less but you still get to deduct that precious mortgage int so your AGI is higher and the combination of that rate applied to that higher AGI is often high enough to raise your tax liability to the point that having that mortage interest deduction has no effect.

#8, but you're still better off with that mortgage interest deduction no?

#9, Actually you are correct. Your taxes owed will be smaller if you do deduct mortgage interest under AMT but you will likely never get a refund because the amount owed will be much higher than the correct amounts withheld from your salary even with zero withholdings.

Basically, under AMT you will end up owing taxes unless you pre-pay on top of what is already withheld from your paycheck.

#10, yes I'm finding this out the hard way with a big tax bill. Any tips for reduction? My accountant says rental property.

from original poster - thank you all, especially #8. to follow up on #10 -- can losses on rental property (via interest expense, real estate taxes, depreciation, etc) be deducted from AMT? any limitations?

#8 and #10 here.
Been there, done that.

Read this first:
http://www.realestatejournal.com/buysell/agentsandbrokers/20070302-dunham.html

It is focused on how active RE investors are getting investigated but it does explain the diff between active and passive and how little you can deduct as a passive investor (that would be you and me).

Your depreciation, taxes, etc. offset revenue to calculate how much tax you owe on your rental property. If those expenses are high enough then you can end up paying no tax on it. Any higher and you have to carry forward to next year. As a passive investor you can't use those "losses" to offset your regular income as outlined in that article.

My experience is that charitable contributions have the biggest effect to reduce AMT.
Last year to we doubled cash giving we got a nice refund of about 2/3 of that extra amount givem which also basically equalled the amount of tax we owed the prior year dues to AMT. Both years were very similar incomes, mortgage interest, etc. and hit with AMT. So we did spend more (in terms of giving) but that ended up in charities of our choice instead of IRS.

So that's the way to do it.