AMT Information

[cube_rat]

Spanky's bonus post prompted this question, I hope someone on the board could answer.

My SO and I will most likely hit AMT this year. I know why AMT exists. Is there a magic number or calculation used to determine if you've hit AMT? I've looked on IRS site and quite frankly, I was confused. I'm just looking for in a nutshell answer. Like "$xxx,xxx.xx of AGI (assuming calcs are doen from AGI) qualifies for AMT"

 

[brewer12345]

There are so many variables that I think it is pretty much impossible to predict what income level will get you to AMT. The only reliable way I have seen is to run a Turbotax dummy return with the data you expect will be close to reality and see what it spits out.

 

[Martha]

The turbotax idea is a good one. Here are a couple of calculators but they require you do really be able to figure out what is income counted for AMT and what deductions are disallowed for AMT. The calculators do have links to that information:

http://1040tools.com/html/wc.dll?cptest1~calc~altmin2000~my

H&R Block 2006 AMT Estimator


The dinkytown website has nice tax calculators but even it won't touch AMT.

The AMT exemption for 2004 and 2005 is:
* $58,000 if married filing jointly or as a surviving spouse
* $40,250 if single or a head of household
* $29,000 if married filing separately

In 2004 and 2005, the available AMT exemption amounts are reduced by 25 cents of every dollar of the amount by which an individual's taxable income for AMT purposes (called AMTI) exceeds: $150,000 for joint filers and surviving spouses; $112,500 for single taxpayers; and $75,000 for a married couple filing seperate returns. The AMT exemption amounts are eliminated entirely if AMTI exceeds: $382,000 for joint filers (up from $346,000); $273,500 for single individuals and heads of households (up from $255,500); and $307,000 for married taxpayers filing separately (up from $271,000).

Good luck making your way through the mess.


EDIT: here is a decent web site that talks about AMT and has links to the tax form and instructions: Top Ten Things That Cause AMT Liability

 

[maddythebeagle]

Good topic. Interesting calculator. I put in some numbers assuming high levels of "qualified dividends" and lower levels of ordinary income and was able to get over 200k in dividend income before the AMT kicked in.

 

[cube_rat]

I plugged my numbers in assuming ~280K with exemptions of 30K. Here's the output

Taxable Income $241,300
Alternative Minimum Taxable Income $248,400
Less: Exemption Amount $24,400
AMTI (after Exemption) $224,000
Tentative Total Minimum Tax $59,220
Regular Tax $69,392
Excess of Minimum Tax over Regular Tax $0

What does this mean Sorry for being so dense. I never had to worry about AMT in my life.

 

[brewer12345]

It means you won't be subject to AMT. AMT only hits you when your regular tax is less than your Minimum tax.

 

[cube_rat]

Thanks so much. Now I can buy that new Porshe with that pile of cash I've set aside for taxes Just kidding!

 

[Gone4Good]

Although the AMT can be endlessly complicated, I think for most individual filers it is not that bad.  I estimate my taxes in Excel and have used the following formula to calculate the AMT with a fair degree of accuracy.

(Total Income - 401K contributions - mortgage interest - charitable gifts) * .28 - 3,500 = AMT

For me this formula produced the same result as the AMT calculator link to within a few hundred dollars.  Your results may vary.

Edit: Formula revised because it was copied incorrectly

 

[Martha]

Although the AMT can be endlessly complicated, I think for most individual filers it is not that bad. I estimate my taxes in Excel and have used the following formula to calculate the AMT with a fair degree of accuracy.

(Total Income - 401K contributions - property taxes - mortgage interest - 3,500) * .28 = AMT

For me this formula produced the same result as the AMT calculator link to within a few hundred dollars. Your results may vary.

Interesting shorthand. You don't include state taxes? It seems like your formula will overstate the tax if a large part of your income is long term capital gains or qualified dividends. These are still taxed at the 15% max, but serve to reduce your AMT exemption.

 

[Gone4Good]

Interesting shorthand.  You don't include state taxes?  It seems like your formula will overstate the tax if a large part of your income is long term capital gains or qualified dividends.  These are still taxed at the 15% max, but serve to reduce your AMT exemption.

I admit there are probably a million ways that formula could miscalculate the AMT.  One of which is if people have large amounts of dividends and capital gains, as you point out.  However, it is (somewhat) safe to assume that most of the folks getting hit by the AMT are working stiffs who are making enough money to fall into the AMT trap and that dividends make up a small portion of there total income.  A simple revision for qualified dividends / cap gains would be to calculate the AMT as above but then subtract the difference between the AMT rate and the qualified rate.

AMT = (Net Income - 401(k) - Mortgage Int - charity) * .28 - (QD * .13) - 3,500

As to your other point, neither state nor local tax deductions are allowed in the AMT calculation.

Also, the 28% rate is used for AGI above $175,000 (joint returns).  Use a 26% rate below $175K (and also change the QD / Cap Gains reduction to QD * 0.11).

 

[Martha]

I admit there are probably a million ways that formula could miscalculate the AMT. One of which is if people have large amounts of dividends and capital gains, as you point out. However, it is (somewhat) safe to assume that most of the folks getting hit by the AMT are working stiffs who are making enough money to fall into the AMT trap and that dividends make up a small portion of there total income. A simple revision for qualified dividends / cap gains would be to calculate the AMT as above but then subtract the difference between the AMT rate and the qualified rate.

AMT = (Net Income - 401(k) - Mortgage Int - charity) * .28 - (QD * .13) - 3,500

As to your other point, neither state nor local tax deductions are allowed in the AMT calculation.

Also, the 28% rate is used for AGI above $175,000 (joint returns). Use a 26% rate below $175K (and also change the QD / Cap Gains reduction to QD * 0.11).

I am not a math person by any means, but wouldn't this be closer?

Estimated AMT=

gross income from all sources
-qualified dividends
-long term capital gains
-401k
-mortgage interest
-charitable contributions
-investment interest

x28%

plus:

long term gains
+qualified dividends
x15%

less $3500

 

[Gone4Good]

That works too. Both ways should result in the same number. Your calculation is much more intuitive though.

The only correction is that the $3,500 deduction is subtracted from the AMT rather than from the income. AMT = (Income * .28) - 3,500 instead of AMT = (Income - 3,500) * .28. I had it wrong in my original post.

 

[Martha]

That works too. Both ways should result in the same number. Your calculation is much more intuitive though.

The only correction is that the $3,500 deduction is subtracted from the AMT rather than from the income. AMT = (Income * .28) - 3,500 instead of AMT = (Income - 3,500) * .28. I had it wrong in my original post.

I changed my post to deduct the 3500 from the AMT rather than income. Why did you set up your formula that way? What is the theory of the 3500 deduction from the estimated AMT number?

 

[cube_rat]

I am not a math person by any means, but wouldn't this be closer?

Estimated AMT=

gross income from all sources
-qualified dividends
-long term capital gains
-401k
-mortgage interest
-charitable contributions
-investment interest

x28%

plus:

long term gains
+qualified dividends
x15%

less $3500

Wouldn't capital gains and long term dividends, possibly investment interest be a plus sign (assuming the dash is a minus sign)

 

[Martha]

Wouldn't capital gains and long term dividends, possibly investment interest be a plus sign (assuming the dash is a minus sign)

No, because the capital gains and qualified dividends are taxed at 15% and are taken into account later in the formula. Investment interest is a permitted deduction, along with most mortgage interest and charitable deductions, under AMT.

I only am trying to work on a rule of thumb.

 

[Gone4Good]

Wouldn't capital gains and long term dividends, possibly investment interest be a plus sign (assuming the dash is a minus sign)

The confusion may be that the starting number "Gross Income from All Sources" already includes dividends, cap gains, etc.  Martha backs that income out because it gets taxed at a different rate then earned income does.

Aren't taxes fun?   


Martha, I haven't a clue why the $3,500 deduction exists. Its just what my tax forms tell me to do.

 

[Martha]

Martha, I haven't a clue why the $3,500 deduction exists. Its just what my tax forms tell me to do.

I first thought that represented the personal exemption number, but the exemption is $3200 per individual for 2005. If that is the case, then it should come out of income, not AMT. Or maybe it somehow relates to a phased out AMT exemption amount. I am thinking that the shorthand isn't going to work so well, because the AMT exemption amount is reduced based on total income and also th fact that deductions are phased out anyway for high incomes. Maybe I'll stick to the H & R Block worksheet.

 

[cube_rat]

So it looks like the exemption increased from $2900 to $3200. Cool. 8)

 

[Gone4Good]

I first thought that represented the personal exemption number, but the exemption is $3200 per individual for 2005.  If that is the case, then it should come out of income, not AMT.  Or maybe it somehow relates to a phased out AMT exemption amount.  I am thinking that the shorthand isn't going to work so well, because the AMT exemption amount is reduced based on total income and also th fact that deductions are phased out anyway for high incomes.  Maybe I'll stick to the H & R Block worksheet.

Good point about the phase out of the exemption. My formula assumes the exemption is completely phased out, which happens at $382K. For joint filers earning less than that you get another deduction equal to the greater of 0 or 58,000 - (AGI - 150,000)*.25

Or you can just stick with the H&R Block worksheets, which will be more reliable.

 

[riskadverse]

Be very wary of AMT calculators. I used one to assist in the sale of a large amount of stock. I mapped out the sale split across 5 years and every iteration between. The results showed very little differences and were very wrong . . . which I found out in early April after selling the entire position the previous year. Online calculators are worth exactly what you pay for them and sometimes will cost you more than you would ever pay knowingly.

 

[Martha]

Be very wary of AMT calculators. I used one to assist in the sale of a large amount of stock. I mapped out the sale split across 5 years and every iteration between. The results showed very little differences and were very wrong . . . which I found out in early April after selling the entire position the previous year. Online calculators are worth exactly what you pay for them and sometimes will cost you more than you would ever pay knowingly.

And the real drag with this is that when you figure out estimated taxes, you are supposed to take AMT into account.

 

[Gone4Good]

And the real drag with this is that when you figure out estimated taxes, you are supposed to take AMT into account.

To avoid federal underpayment penalties all you have to do is pay at least as much in the current year as your tax liability in the prior year. If your joint income is over $150,000 you have to pay 110% of the prior year's tax liability to be "penalty proof".

 

[Martha]

To avoid federal underpayment penalties all you have to do is pay at least as much in the current year as your tax liability in the prior year. If your joint income is over $150,000 you have to pay 110% of the prior year's tax liability to be "penalty proof".

Yes. That worked great for me as long as income kept going up. This year income is down considerably. So I struggled with figuring out what was enough to hit at least 90% of what will be due this year. Probably not a frequent problem but can occur as people leave their jobs and go into retirement and can occur if you have big capital gains one year and not the next.