Alternative minimum tax makes charitable gifts less expensive

According to IRS regulations, AMT applies to taxpayers who have certain types of income that receive favorable treatment, or who qualify for certain deductions, under the tax law. These tax benefits can significantly reduce the regular tax of some taxpayers with higher economic incomes. The AMT sets a limit on the amount these benefits can be used to reduce total tax.

It is necessary to look beyond the obvious benefits of the charitable deduction, especially when donating to an organization that rewards taxpayers with a Missouri tax credit, to calculate the true cost of your gift.

Deduction differences

Those subject to the alternative minimum tax may be able to make charitable contributions at a cost less than those subject to regular tax rules. The $10,000 donation, in the example that cost an AMT taxpayer $1,600, will cost a regular taxpayer $2,860. Either way, taxpayers receive a significant benefit for their charitable contribution.

So why does the true cost of the donation differ between AMT taxpayers and regular taxpayers? One key difference between AMT and regular tax rules is the deduction for state income taxes: For regular tax, state income taxes are treated as an itemized deduction; under AMT rules, state income taxes are added back to taxable income. Therefore, they are disallowed as deductions for the AMT.

Total cash outlay

With this in mind, let’s look at the discrepancy in total cash outlay when there is exposure to AMT, coupled with a donation to a Missouri charity that allows donors to apply for and receive Missouri tax credits equal to 50 percent of their donation. Assume the taxpayer itemizes deductions, is in the 35 percent federal, 28 percent AMT and 6 percent Missouri tax brackets, makes a $10,000 donation to the charity and receives $5,000 in Missouri tax credits. (See table for comparison.)

Applying the above information to your situation requires careful consideration of all the facts and circumstances. If you make such a charitable donation, consult your tax adviser to determine its true cost. You may be surprised to see how far you can make your money go.

Kyle Hesemann, is a manager with BKD LLP in Springfield. He may be reached at khesemann@bkd.com.