Masha Quigley filed her return for 2009 and reported taxable income computed as follows.
|
AGI (includes $2,000 state income tax refund previously |
|
|
deducted with a tax benefit) |
$ 80,000 |
|
Personal exemption |
(3,650) |
|
Miscellaneous itemized deductions in excess of 2% of AGI |
(28,000) |
|
Taxable income |
$ 48,350 |
Although Masha had state and local tax expense of $9,000, she chose not to deduct them in calculating taxable income. Masha believed that if she claimed the state and local taxes, she would be subject to the AMT. As a result, she filed her Form 1040 as a single individual and reported a tax liability of $8,281. Upon audit of the return, the IRS concluded that Masha should have included the $9,000 of state and local taxes in her itemized deductions. Thus, her decision not to deduct the state and local taxes did not relieve her from being subject to the AMT. Who is correct? Explain.