State income Tax Refunds - Amt Adjustment

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The Amt adjustment for State income Tax Refunds, line 8 on Form 6251, is a reduction to your Alternative Minimum chargeable income. There isn't much a taxpayer can do about this other than to understand just a petite bit of what is going on.

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How is State income Tax Refunds - Amt Adjustment

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Just for fun, let's start with the Irs' explanation for this in the instructions to Form 6251:

"Include any reimbursement from Form 1040 line 10, that is attributable to state or local income taxes. Also include any refunds received in 2009 and included in income on Form 1040, line 21, that are attributable to state or local personal asset taxes or normal sales taxes, foreign income taxes, or state, local, or foreign real asset taxes. Enter the total as a negative amount. If you include an amount from Form 1040, line 21, you must enter a narrative and the amount next to the entry space for line 8. For example, if you include a reimbursement of real asset taxes, enter "real property" and the amount next to the entry space."

What does this mean in "plain English?" The answer is best done with an example:

Assume a incorporate paid ,000 in state income taxes in 2008 and itemized this deduction (Schedule A), which they were allowed to do. But the state income tax return filed showed they had overpaid by 0. This 0 reimbursement was received from the state in April, 2009.

For quarterly Tax purposes, the 0 is reported as income in 2009. This is because of the tax principle that if an permissible deduction for some expense is taken in one year (e.g., 2008), but that expense is refunded in the following year, instead of amending the 2008 return to "correct" the deduction, the permissible tax fix is to reverse the deduction in 2009 by reporting it as income. Note in total it beyond doubt was only a ,500 expense, which is the deduction of ,000 less the reimbursement of 0.

For Amt purposes, both income (the refund) and deductions need to be shown on an apples-to-apples basis. Because there is no deduction of the ,000 state taxes for those in the Amt, any related reimbursement amount, Tax Refunds, line 8, does not want a salvage of that item in income like you see in the quarterly Tax. The 0 is deducted from Alternative Minimum Tax income in 2009, effectively netting any impact, income or deduction, to zero.

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