You can rally get shafted despite all your tax planning by the infamous ALTERNATIVE MINIMUM TAX or AMT.
Individuals with a higher income may be subject to the Alternative Minimum Tax. Under the tax law, certain tax benefits can significantly reduce a taxpayer’s regular tax amount. The AMT sets a limit on those benefits. If the tax benefits would reduce total tax below the AMT limit, the taxpayer must pay the higher Alternative Minimum Tax amount.
These are some “tax preference” items:
- Sales taxes and state income taxes
- Accelerated Depreciation
- Stock by exercising an incentive stock option and you did not dispose of the stock in the same year
- Tax exempt interest from private activity bonds
- Intangible drilling, circulation, research, experimental or mining costs
- Amortization of pollution-control facilities or depletion
- Income (or loss) from tax-shelter farm activities or passive activities
- Income from long-term contracts not figured using the percentage-of-completion method
- Interest paid on a home mortgage NOT used to buy, build or substantially improve your home
- Investment interest expense
- Net operating loss deduction
- Any general business credit
- Qualified electric vehicle credit
- And several other items
The Alternative Minimum Tax is actually a parallel tax system that attempts to make sure no one pays zero tax. It makes no sense and is purely punitive in nature.
Your itemized deductions are often times your worst enemy in this tax situation.
You need to do some juggling when doing your tax planning. Try different scenarios for those things you can control. Paying state taxes early does not pay with this tax. Deferring miscellaneous deductions to a year your income is lower does help.