The alternative minimum tax (AMT) is a parallel tax system. You calculate the federal income tax you owe two ways–under the AMT rules and under the regular income tax. Each year, you pay whichever is greater, the AMT or the regular tax.
Many deductions that you can take on Schedule A of your regular tax return don’t reduce your AMT. That includes state and local taxes. In fact, paying large amounts of state and local taxes may put you in the AMT.
If you live in a high-tax area, consider taking the standard deduction on your tax return rather than itemizing. The standard deduction for married couples filing jointly is $10,300 in 2006, plus $1,000 for each spouse who’s at least 65.
Moreover, using home equity interest for purposes other than home improvements can put you into the AMT. Therefore, you should try to use the proceeds from a home equity loan for improvements to your primary residence or to a second home. Put the money into a separate account that you tap for home improvements, to help reduce your exposure to the AMT.
