Income tax vs gain tax strategy question

[audreyh1]

This is true. Thanks for pointing out a wrinkle in the tax laws that I was previously unfamiliar with.

However, OP appears safe from paying additional tax under AMT. Using form 6251 for tax year 2013, I see in the instructions for form 6251 line 29 that the $78,750 exemption isn't phased out until AMT income exceeds $465,000 for a married couple filing jointly. My calculations indicate that OP, with a projected income of around $420,000, will retain enough of the exemption to avoid invoking AMT. With the inflation adjustments for 2014, there will probably be an even larger margin.

I hope I did the calculations correctly, but I can only add my recommendation to what others have already said - OP should do some rough plots using 2014 tax software to get an informed estimate of where he stands. That will give him a clearer picture of whether realizing the entire $350k gain in 2014 is a viable option.

http://www.irs.gov/pub/irs-pdf/f6251.pdf

http://www.irs.gov/pub/irs-pdf/i6251.pdf

Without knowing what the ordinary income is, this is hard to speculate.

But say he had $80,000 of ordinary income plus $350K of capital gains, assuming married filing jointly:

His AMT exemption amount would be reduced to $11,775, so he would pay AMT rate of 26% on the difference $80,000-$11,775 = $68,225. AMT would be around $17,739.

If his regular tax on $80,000 is less than that, then he pays the difference. Assuming standard deduction, allowed exemptions (for two), and no other credits, etc., the tax on $80,000 would be around $8,528 for this scenario.

So this would lead to an "extra" AMT of $17,739 - $8,528 = $9,211

No difference on the cap gain tax in either case, but the taxes on ordinary income would more than double. [LT capital gains tax is $51,045 in this scenario plus another $6,840 with the new Net Investment Income tax]

With ordinary income of $50,000, the AMT exemption improves to $19,275, but the AMT (tax owed above ordinary amount) would still cause an additional $4,069 in taxes. [LT capital gains tax is $46,437 in this scenario plus another $5,700 with the new Net Investment Income tax]

Since he anticipates paying cap gains taxes of $45K on $350K in realized gains, his ordinary income is probably closer to $40K. AMT reduces quite a bit - in this scenario it only adds an additional $2,350, but the new Net Investment Income tax will add another $5,320 to his tax bill.

By the way, if he took half the gains in Dec 2013, and half the gains in Jan 2014, he would owe NO AMT, NO Net Investment Income Tax, and his cap gains taxes would run about $18,375 which is way less than half of the $45K bill he is anticipating for 2013. [Assuming ordinary income of $40K MFJ with standard deduction]

Takeaway: If you can limit your annual income, married filing jointly, to $250K total, you will have no Net Investment Income tax, no limits on exemptions or itemized deductions, and very likely no AMT at all, plus probably a reduced rate on your capital gains (depending on your ordinary income level). So perhaps the smart thing to do would be take whatever cap gains will get him close to $250K this year, and take the remainder in Jan 2013.

 

[Alan]

+1 I get my TT through Vanguard and was talking with a rep yesterday on something else and he indicated that TT should be available in mid-Dec. Ditto for estimates of year end income and capital gain distributions.

FYI, VG preliminary estimates for year end Cap Gains came out yesterday.

https://personal.vanguard.com/us/insights/article/preliminary-capital-gains-11122013

 

[REWahoo]

FYI, VG preliminary estimates for year end Cap Gains came out yesterday.

https://personal.vanguard.com/us/insights/article/preliminary-capital-gains-11122013

Actually, that link is to the estimate as of Nov 11. The Nov 21 update is here:

https://personal.vanguard.com/us/insights/article/update-prelimcapgains-112013

 

[karluk]

Audreyh1, I will defer to your superior knowledge of the tax laws and edit my previous post to remove the paragraph that suggests OP is safe from the AMT.

 

[audreyh1]

Audreyh1, I will defer to your superior knowledge of the tax laws and edit my previous post to remove the paragraph that suggests OP is safe from the AMT.

Well hopefully you got a clearer picture of how it actually works - that's the important thing.

I have my own spreadsheets I am able to use as what-if calculators, built over a decade of paying estimated taxes including AMT. Unfortunately they aren't in a form that can be shared publicly, but I can at least run some quick scenarios.

 

[Alan]

Thanks for the updated link REW.