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AMT filers: Capture a retroactive tax break on refinancings

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in Small Business Tax,Small Business Tax Deduction Strategies

As mortgage rates fell, you may have refinanced your home several times over the last few years. You can generally still deduct all the mortgage interest on refinanced loans, up to the amount of outstanding principal. But if you were forced to pay the alternative minimum tax (AMT), you may forfeit the tax benefits on a second or third refinancing.

Strategy: File an amended return to recapture the tax benefits on your 2004 return. In a brand-new ruling, the IRS gives AMT filers the go-ahead for this refund opportunity. (IRS revenue ruling 2005-11)

With an ever-increasing number of taxpayers falling prey to the AMT, that new ruling takes on added significance.

Background: The AMT is a parallel income-tax system: You may need to run the numbers both ways (regular and AMT) and then pay whichever total is higher.

To determine your alternative minimum tax income (AMTI), you must add back certain itemized deductions, nontaxable income and other amounts to your taxable income. But you don't have to add back "qualified housing interest" to this calculation.

Not all deductible mortgage interest is characterized as qualified housing interest. For AMT purposes, the tax law definition limits it to interest on "acquisition debt" incurred to acquire, construct or improve your principal residence or one other home, as long as the debt is secured by the property. Refinanced debt qualifies as acquisition debt up to the principal amount of the acquisition debt.

Now the IRS has expanded the interest deduction for refinanced debt for AMT purposes to include interest on any number of refinancings.

To reflect that change, the IRS has already revised the work sheet and instructions on the form used to compute the AMT (Form 6251). You can rely on the new ruling to make any necessary adjustments on your 2004 return.

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