Option Minimum Tax - Medical and Dental Expenses

The itemized deduction for medical and dental expenses is an item that affects a considerable number of individuals who're stuck in the Alternative Minimum Tax. Depending on the sort of wellness insurance an individual has (high deductible plan having a Well being Savings Account versus a high quantity of coverage having a small copay), and also the type of expense incurred (elective procedures versus immediate medical needs), there may perhaps be some fairly easy opportunities for AMT savings. The key to this is inside the timing of when the medical bills are paid.

For the Normal Tax, an itemized deduction is allowed for medical expenses paid in the course of the year. A tax benefit is received, even so, only to the extent the expenses exceed additional than 7.5% of the taxpayer's adjusted gross income (AGI). AGI will be the number on the last line (Line 37 for 2009) of page 1 of the Form 1040.

For purposes of the AMT, even so, there is a slight difference - the threshold a taxpayer need to exceed is 10% of AGI, as opposed to 7.5%. This distinction in the computation is the AMT item reported on the Form 6251. The tax-saving strategy for medical expenses is basically the identical for the AMT as it's for the Standard Tax, but it also requires keeping an eye on that 2.5% distinction. As mentioned above, the key is when the medical expenses are incurred and, most importantly, when those expenses in fact are paid.

If an individual at present is within the AMT, to the extent any elective surgery, dental, vision work, etc. could possibly be delayed until next year (so long as these expenses are not covered by medical insurance, and are not cosmetic improvements that would not be deductible medical expenses within the first place), consideration should be given to doing so. If the taxpayer just isn't inside the AMT next year, a tax benefit might be achieved that would not be obtained this year. Also note that, even if the individual is inside the AMT once more next year, to the extent a grouping of medical expenses outcomes in exceeding the10% threshold, the taxpayer will at the least get a benefit for that amount.

For example, assume AGI is $100,000 and that it'll be the exact same next year. The taxpayer decides to get "fixed-up" a bit, along with the list consists of a physical exam with diagnostic tests and x-rays, seeing the dentist for braces, and Lasik eye surgery - all together, $20,000 in medical expenses. For a taxpayer within the AMT, it could be a disaster to do half of this now and half next year - the total after-tax price could be the full $20,000. If instead all of the work is carried out in 1 year, the IRS delivers a nice subsidy - as a lot as $2,800 for an AMT payer ($20,000 much less $10,000 (10% of AGI), multiplied by the 28% AMT bracket).

Even better, if in this example the taxpayer is in the AMT this year but by means of tax planning will not be in it once again next year, the IRS' subsidy possibly might be $5,000 ($20,000 less the 7.5% of AGI, times the 39.6% bracket - the expected highest Standard Tax bracket in 2011).