Your state may impose a capital gains tax. State taxes aren’t deductible from the alternative minimum tax (AMT) so this added tax may increase the chance you’ll owe the AMT.
Suppose you sell stock this year, resulting in a $100,000 long-term capital gain. Your state taxes such gains at a 5 percent rate so you’d owe $5,000. Typically, good tax planning would call for you to pay this $5,000 state tax by December 31, 2006, in order to get a $5,000 deduction on your federal tax return for 2006.
However, your tax advisor might say that you will owe the AMT this year. Because state taxes are not deductible for the AMT, paying this tax in 2006 won’t cut your tax bill.
Instead, you can pay the extra state tax in 2007. If you’re not in the AMT next year, you may take that $5,000 payment as a deduction on your 2007 federal income tax return.
