Capital Gains and AMT

[Lagniappe]

I've spent several months talking myself into rebalancing my portfolio, and finally bit the bullet - moved most of it to DFA funds, with an allocation I believe I'll be comfortable with for some time to come. Focused on moving funds where I had long term capital gains, thinking 15%, how bad can the taxes be. After entering the sales into quicken, suddenly I have a 5 figure AMT?!?!

Apparently, although I pay 15% on the long term gains, the gains push my other income into a higher tax bracket, and presto change-o, AMT. Can anyone point me to a good explanation of what Quicken is telling me? I probably need to figure this out before January 15 when estimated taxes are due.

I think I'll be using a tax preparer for the first time in a really long time this year. How does one find a reputable, reasonable tax person in a new area? I'm in Northern California.

[LOL!]

We are on the cusp of paying some AMT for the first time ever. I am using TurboTax in various scenarios before I make any year-end moves.

I think any preparer you hire will also use software, so why not use TT yourself? (Or is that what you mean by using Quicken?). One should get the latest version for 2006 tax year because AMT exemption amounts have changed.

One thing I did was have my employer defer a bonus check until January 2007 rather than December 2006. I will turn 50 next year, so I can put an extra $5000 into my 401(k), so I might as well start with that bonus check. That move alone should save me a thousand.

Another thing I noticed running scenarios is that I can "tune" my charitable donations and property taxes to avoid AMT. I just know that I do not have to pay my entire property tax bill in December -- I can pay a portion in December and a portion in January. By paying a lower prop tax amount and increasing charitable donations, I can avoid AMT. If I had just paid the full prop tax amount and lower charity amounts, I would have had to pay the AMT. Don't ask me why, because I am just running TT as if it were a spreadsheet.

Good luck with whatever you decide to do!

[audreyh1]

Yes, this happens to me all the time because I usually take a rather large capital gain (I have some assets that I sell off almost every year), and I have fairly low short-term income. Most of our annual income is either long-term capital gains or qualified dividends.

So we usually get knocked from a 15% tax bracket into a 26% (AMT) tax bracket on our "regular" income and most deductions get knocked out the window - in other words you get taxed at 26% from dollar 1.

This seems quite unfair, but that is just how the AMT is set up. When they look at whether you owe AMT, they look at you total income, including all that stuff with low tax rates. Now, fortunately, you only pay AMT rates on your income that is NOT qualified dividends or long-term cap gains, but still if you have kept your this income low, it doesn't matter!

It doesn't hurt so much if you have enough income to be paying in the 25% or 28% tax bracket, but still, since it is taxed from dollar 1, you often end up paying a little more (just not nearly as much more as if you are at an even lower tax bracket).

When tax brackets were higher, this kind of thing wasn't even hardly noticed LOL!

I laugh, because this just has been part of my life for years.

Audrey

[tryan]

Yup, I hit AMT every year I've sold a property ... and the accountant is very unsympathetic saying "it's only 28%, in past years you'ld be paying a third or even half! Historically, federal taxes are very low." No sholder to cry on here.

[boathole]

Originally Posted by audreyh1

In other words you get taxed at 26% from dollar 1.

This is not quite correct. With AMT, you start with you AGI and then deduct the AMT deduction amount and then you pay 26% on what is left. You only pay AMT if the tax on your AGI minus all your allowed deductions is lower than what your AMT would be. That is, there are two tax systems in the US--the regular one and the AMT. This is scandalous but shows just how far Congress is willing to go to get money to pay off its contributors.

If you don't pay AMT, it is because your regular tax is higher than the AMT tax amount. If you avoid AMT, it is because you are paying more than AMT would force you to pay. This is why the AMT is so insidious. High income people pay upwards of 35% on their marginal income (over $335,000 -- good luck) so the more you make the less likely it is that AMT will be an issue for you. These people get to take all the tax deductions the Congress had handed out while the middle income people, paying 28% up to $150,000 in income, have the AMT limiting their use of the tax deductions.

The AMT was designed to insure that high income people paid a minimum of taxes. Now it is used by Congress to give high income people huge tax breaks at the same time limiting their use by everyone else. The sleazyness and duplicity of this really burns me up.

Ray

[LOL!]

Originally Posted by Ray

Now it is used by Congress to give high income people huge tax breaks at the same time limiting their use by everyone else.

Wow, I was using that loophole and didn't even know it: Earn a high income and thus avoid the AMT. Works for me.

[dmpi]

I'm sitting a good size cap gains. So far I've been just under the wire with AMT tax (28% bracket).
Should I take my cap gains when my income is high vs. after I FIRE and have lower income?
Should I take it all at once vs. or spilt it up into multiple years?

I've been through the AMT worksheet to see if I have to pay it. That thing is hard to understand.

[LOL!]

Originally Posted by dmpi

Should I take my cap gains when my income is high vs. after I FIRE and have lower income?
Should I take it all at once vs. or spilt it up into multiple years?

I've been through the AMT worksheet to see if I have to pay it. That thing is hard to understand.

Those are exactly the kinds of questions that running TT scenarios can answer. Since you are gonna use TT to do your taxes anyways, why not just get it now and run the numbers. You don't even have to look at the AMT worksheet, so you don't even have to understand it.

[audreyh1]

Originally Posted by Ray

This is not quite correct. With AMT, you start with you AGI and then deduct the AMT deduction amount and then you pay 26% on what is left. You only pay AMT if the tax on your AGI minus all your allowed deductions is lower than what your AMT would be. That is, there are two tax systems in the US--the regular one and the AMT. This is scandalous but shows just how far Congress is willing to go to get money to pay off its contributors.

Ray

Ooops - you're right Ray. You do get to deduct the AMT deduction amount.

Yes, it really is pretty scandalous.

Audrey

[FIRE'd@51]

The "rich" can be caught by the AMT too, especially if they have a lot of qualified dividend income and/or LT capital gains, coupled with certain itemized deductions (real estate taxes on their mansions and state and local income taxes). Also, the AMT exemption begins to phase out at a rate of $0.25 for every $1 over 150K. The current exemption is $62,550, so folks with AGI over 400K get no AMT exemption. BTW, that exemption is scheduled to drop back to 45K in 2007, so folks making 330K would get no AMT exemption.

[mathjak107]

last year we paid a huge amt tax, i was able to get it down by filing seperatly. since once you exceed a certain amount of income and lost most deductions there is no longer a distinction between filing jointly or seperatly. what did happen is if we filed jointly my entire income was hit with the amt. since it was the sale of some property that was only in my wifes name only she was hit with the amt.

it wasnt a huge savings but it was less

[mathjak107]

this year we get hit again by the amt. with just our normal income this year the fact that we paid sooooo much in state and local taxes for last years sale coupled with my dental implants this year triggered it again.

[FIRE'd@51]

Yep, if you live in a state like NY with high income taxes and high property taxes, the AMT is a real threat, even for middle class folks.

[mathjak107]

my wife and her son are partners in the same busines. we live in nyc , he lives in new jersey.

on the same sale we paid 90,000 in state and local taxes

he paid 63,000 in new jersey

[FIRE'd@51]

Big difference - and NJ is not exactly what you would call a low-tax state.

[mathjak107]

its amazing, the nyc taxes alone were 35,000 or so

[JohnEyles]

I'm ok with AMT this year, but am I likely to need to worry about this turkey
in the future ?

I foresee future tax years looking like: $15K in dividend income (some
qualified and some not), $10K in annuities, and maybe $15K in LT capgains.
The idea is after deductions/exemptions (I'm single) I'll have taxable income
of $30K, max'ing out the low brackets.

Oh well, being lazy, I should just go test it out in TurboTax ... I'm just not
sure where the stressors are.

[FIRE'd@51]

Originally Posted by JohnEyles

I'm ok with AMT this year, but am I likely to need to worry about this turkey
in the future ?

I foresee future tax years looking like: $15K in dividend income (some
qualified and some not), $10K in annuities, and maybe $15K in LT capgains.
The idea is after deductions/exemptions (I'm single) I'll have taxable income
of $30K, max'ing out the low brackets.

Oh well, being lazy, I should just go test it out in TurboTax ... I'm just not
sure where the stressors are.

It looks like you're OK for next year (2007) also. Even if Congress lets the AMT exemption revert back, as a single filer you would still have an AMT exemption of 33.75K (for 2006 it's 42.5K). So you would have AMT taxable income of 6.25K, which would still be taxed at the 5% rate for qualified dividends/LT gains, so it looks to me like your AMT liability would only be $313, which is lower than your regular tax calculation for taxable income of 30K.

[mathjak107]

its triggered both by exceeding income limits only or deductions only. either one can do it. this year our income is the same normal income we got for the last decade but deductions forlocal taxes paid and 30,000 medical for dental implants triggered it.

when we triggered it last year my wife's business sold off some real estate in nyc and her take was a million bucks. truthfully we could have filed a short form we had so few deductions but the income level all by itself triggered the amt. the amt is usually thought of as a tax on deductions but its also a tax on just income even if you have no deductions.

[tryan]

The "problem" - as my accountant said - is that the amt trigger is not set to inflation. Soooo eventually everyone will be triggering amt (until congress does something to change it).