Does underestimated state tax withholding affect the alternative minimum tax one has to pay?

Question

My wife and I file a joint tax return.
Our accountant made a mistake by underestimating our personal state tax witholdings for 2005. I detected the error and got a higher state tax refund. However he tells us that, on the federal side, correcting the state tax error won't make any difference because of the alternative minimum tax. Is that correct?
If it doesn't in then in what situations does increasing/correcting the state tax withholdings make a difference for the federal tax return?
Thanks

Answer 1

If you claimed state tax payments as an itemized deduction, they are added back to your taxable income for the AMT. However, amending your Federal taxes to claim the larger deduction would reduce 'normal' taxable income by the same amount it would increase the add-back. The net change should be zero.

I am more worried that he ESTIMATED state withholding at all. The actual withholding should be clearly stated on your W-2. Unless he made a simple clerical error copying the number, I would find a new accountant.

Answer 2

OK, here's what happened. You are obviously self-employed...that is why you make estimated state and federal tax payments...that is why you have nothing withheld on a W-2.

Fine, so on your federal tax return, you filled out a Schedule A to record, among other things, amounts paid to the state for income tax purposes. Normally, if the amount you paid to the state was $10,000 and you entered $8,000, you could amend the federal return...change the $8,000 to $10,000...and get a refund. However, like your account said, you are subject to the Alternative Minimum Tax. Under AMT, no income taxes paid to the state are deductible...your AMT is not affected in any way by the state tax paid. You pay whichever is higher, your AMT or regular tax. If your AMT is higher (which it is), and you discover something that lowers your regular tax but doesn't change your AMT, then there is no need to amend your tax return because you won't get a refund.

Had the amount you entered on your original tax return been erroneously HIGH, you may need to do an amended return. Why? It may be possible that with the correct state tax paid, your regular tax will now increase and be higher than your AMT. However, since the amount entered was erroneously low, you needn't worry.

Hope this helps :)

Answer 3

I agree with StevenF. I read this question because it raised a red flag that you "underestimated state tax withholding". That should never happen. You should not file your return with estimates. He is right about the AMT also, I was in that situation last year and played around with the state income tax withholding and it made no difference in my federal tax liability.

Answer 4

whatever stuff the first two respondents are smoking give me some. state tax isnt on amt. amt ignores it. taxmans, answer although long winded, is your answer