By Kathleen Day
Washington Post Staff Writer
Sunday, April 15, 2007

If you're subject to the alternative minimum tax and using Intuit's TurboTax to prepare this year's returns, you might be missing a break that could save you some money.

Last year's version of the popular tax preparation software alerted users hit by the AMT that they might be able to save money on their state returns if they took a deduction on their federal returns for state sales tax.

This year, however, the software left out the alert. The omission was caught by Peter Sklarew, a tax attorney in the Department of Justice. He stumbled on it not in the line of duty, but as a rank-and-file taxpayer. He first learned about the break a year ago, while using TurboTax to prepare his 2005 return; last week he noticed the tip was gone.

TurboTax spokesman Bob Meighan confirmed the tip was accidentally dropped from this year's version. He said the omission was the result of Congress waiting until late December to extend a rule allowing taxpayers to deduct state income or state sales tax (but not both) on their federal filing. The company scrambled to add Congress's last-minute changes to its software and believes it added all but this one.

This break, of course, applies only to those who must pay under the AMT and who live in a state that permits a state sales tax deduction on state returns. Locally, Maryland and Virginia permit this deduction, but the District does not.

An estimated 4.2 million taxpayers will be affected by the AMT this year. Because the AMT -- which was intended to target the rich -- hasn't been indexed for inflation, it increasingly hits the upper middle class.

Here's how the sales-tax break works: Higher-income folks must tabulate taxes under the regular system and under the AMT, paying whichever is more. If you pay under the regular system, you should deduct your state income tax or sales tax, whichever is larger, because that will reduce your federal tax bill. If you pay under AMT, it doesn't matter which state tax you choose, because that deduction won't count in computing what you owe the federal government.

But for AMT filers, the state tax that you choose in calculating your federal taxes could make a difference on your state return. States, of course, don't allow a deduction for state income tax; that can only be claimed on your federal return. But state sales tax deductions are permitted in some states, and that can reduce your state tax bill, even if you pay the federal AMT.

TurboTax users please note: The software won't remind AMT payers to use state sales tax when itemizing on federal returns. You'll have to remember to do it. And the software will automatically subtract your state income from deductions claimed on the state form, even if you didn't deduct it federally. You must override the computer. Just delete the number the computer puts in and type in "zero," Meighan says.