Do you manage withdrawals to avoid AMT?

[Disappointed]

Anybody plan and manage withdrawals to avoid hitting the AMT limits?

[pb4uski]

No. AMT has never been a problem since I stopped working.

[audreyh1]

Quote:

Originally Posted by Disappointed Anybody plan and manage withdrawals to avoid hitting the AMT limits?

I don't have any choice. 90% of my assets are taxable, and what they throw off in distributions and interest, and what I realize as capital gains in a given year determines whether we are subject to AMT.

We only seem to avoid it after market drops when distributions drop.

[RunningBum]

I hit AMT when I tried to convert to the top of the 25% bracket one year. I recharacterized to avoid it.

[mxisland]

Quote:

Originally Posted by audreyh1 I don't have any choice. 90% of my assets are taxable, and what they throw off in distributions and interest, and what I realize as capital gains in a given year determines whether we are subject to AMT. We only seem to avoid it after market drops when distributions drop.

Does a different strategy with a face value of lower returns maybe actually net out to more advantageous net return than your current allocation given your AMT issues? For example, switching from whatever you're holding now to a long term index fund strategy plus municipal bonds which aren't taxable.

[audreyh1]

Quote:

Originally Posted by mxisland Does a different strategy with a face value of lower returns maybe actually net out to more advantageous net return than your current allocation given your AMT issues? For example, switching from whatever you're holding now to a long term index fund strategy plus municipal bonds which aren't taxable.

Using funds which generate low distributions, and municipal bond funds which are AMT free are good strategies for avoiding AMT.

But to switch to such investments incurs high capital gains, which will generate sizable AMT in the year you make those sales. Best to take this kind of step when you can harvest losses - i.e. after a bear market occurs.

[mxisland]

Quote:

Originally Posted by audreyh1 Using funds which generate low distributions, and municipal bond funds which are AMT free are good strategies for avoiding AMT. But to switch to such investments incurs high capital gains, which will generate sizable AMT in the year you make those sales. Best to take this kind of step when you can harvest losses - i.e. after a bear market occurs.

You're right. What do you do with the gains from your current strategy, though? If you're re-deploying them in the same allocation, can you start funneling them into the new strategy and eke out some benefit over time?

[audreyh1]

Quote:

Originally Posted by mxisland You're right. What do you do with the gains from your current strategy, though? If you're re-deploying them in the same allocation, can you start funneling them into the new strategy and eke out some benefit over time?

Supposedly as part of rebalancing - a rather gradual approach. To switch strategies in taxable accounts it is usually best to wait for years where you can tax lost harvest.

[Disappointed]

How does the AMT handle capital gains? Does it just treat them as ordinary income subject to 26% and/or 28%?

[audreyh1]

Quote:

Originally Posted by Disappointed How does the AMT handle capital gains? Does it just treat them as ordinary income subject to 26% and/or 28%?

No! Thank God!

Capital gains are treated exactly the same way under both the regular tax, and AMT. 0% until total income (AGI) reaches the top of the 15% tax bracket, 15% until total income reaches $250,000 for MFJ, 18.9% until total income the top of the 36% tax bracket, and 23.9% for amounts above that.

In other words - only ordinary income is subject to the AMT.

Edited above because I forgot to add the NIIT (net investment income tax) on cap gains once your total income exceeds $250,000 as Kaneohe reminded me later.

[kaneohe]

Quote:

Originally Posted by audreyh1 No! Thank God! Capital gains are treated exactly the same way under both the regular tax, and AMT. 0% until total income (AGI) reaches the top of the 15% tax bracket, 15% until total income reaches the top of the 36% tax bracket, and 20% for amounts above that. In other words - only ordinary income is subject to the AMT.

audrey.....might want to check your marginal tax rate on CGs before you get too excited. In the exemption phaseout region, large CGs reduce the exemption and can result in marginal rates of about 26% (including NIIT). While technically the reduction of the exemption results in increased tax on the ordinary income, this effect was due to the CGs which you can see if you check the marginal rate.

[audreyh1]

Quote:

Originally Posted by kaneohe audrey.....might want to check your marginal tax rate on CGs before you get too excited. In the exemption phaseout region, large CGs reduce the exemption and can result in marginal rates of about 26% (including NIIT). While technically the reduction of the exemption results in increased tax on the ordinary income, this effect was due to the CGs which you can see if you check the marginal rate.

Don't worry - I know how to compute the taxes on my capital gains. But the above are not AMT specific issues.

Yes, in addition to what I specified, there is the NIIT which tacks on an additional 3.9% for capital gains on total income above $250,000. I forgot to add that in above. This is true under both tax systems.

And reduction of the personal exemptions and also of charitable deductions as income rises above $311K or so for MFJ under regular tax rules but not under AMT. AMT has it's own deduction rules and they are quite different.

[gerntz]

Hearing this is last year for AMT.

[MichaelB]

Let's not ruin the thread by speculating on taxes.

[Dash man]

Quote:

Originally Posted by MichaelB Let's not ruin the thread by speculating on taxes.

How would you prefer the thread be ruined?

[kaneohe]

Quote:

Originally Posted by Disappointed How does the AMT handle capital gains? Does it just treat them as ordinary income subject to 26% and/or 28%?

http://www.urban.org/sites/default/f...inimum-Tax.PDF

".................... When calculating the additional tax owed on the next dollar of capital gains, AMT taxpayers first pay the statutory 15 percent rate on the
gain directly. Then, since the increase in AMTI will decrease the value of their AMT exemption, they pay additional tax on the portion of their other income that is no longer sheltered by the AMT exemption. As a result, the actual tax burden on additional realizations is the 15 percent rate on gains plus the applicable AMT rate (26 or 28 percent) multiplied by the exemption phase-out rate (25 percent). Depending on what AMT bracket the taxpayer is in, this interaction increases the effective marginal rate on long-term capital gains and dividends from 15 percent to either 21.5 or 22 percent. "

(plus the 3.8% NIIT tax if applicable).