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Alternative Minimum Tax


Christian

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Most of those I serve have no need to be concerned about the AMT. One client of mine has income which fluctuates based on received capital gains from a host of mutual funds he holds and pays his taxes by estimate. We do a workup this time of year to adjust his final payment to reflect this. To date he has never had to pay the AMT. He had large payments from his holdings in 2017 much more than 2016. It looks as if he may have to pay a chunk in this tax even though he uses NONE of that long list of deductions in the rules. For those of you who deal with this particular tax routinely my question is this. Will a large increase in capital gains from one year to the next trigger this tax in and of itself?

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At one point during the legislative process they were going to trash the AMT, but with the revival of $10K in taxes I suppose they felt like they had to get some of this money back.

Another thing is the elimination of 2% itemized deductions, which was a big item in the AMT with no credit in the forthcoming year.

I don't look for as many people having to deal with the AMT after 2017, but to answer your question is yes it will trigger the AMT if sufficiently large.  And if it happens in just one year remember to explore the credit in the succeeding year (if it is still around).

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I was of the opinion a large increase in capital gains over prior years would trigger the additional tax but do not understand the reference to a credit for succeeding years. If he pays some 8 thousand dollars in AMT for 2017 does this create a credit of some type for next year in which his gains will likely be much less. Looks like I've got to do some research as I have not had this one up until now as no other of my folks ever encounter this.

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do you use ATX?  if so, check page 2 of the 6251.  I have some returns that page 2 is not populating and thus AMT is calculated.  Page 2 is where it adjusts for capital gains and qualified dividends.   Once the figures from page 2 are entered, the there is no more AMT.  This is not the case on all of my returns, but i have a handful with this issue.  I figure that it will resolved eventually with a forms update.  This may not be your issue, but it is worth giving it a look.

 

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The increase in cap gains may or may not trigger the AMT.  The AMT calcs still carve out the cap gains that are taxed at the cap gain rates.

As some background of how it worked:  Before the new law was enacted, cap gains had the potential to affect the AMT because, although those gains were still taxed at the cap gain rates, those gains were included in the calculation of AMTI, and the AMTI is used for the calculation of phasing out the AMT exemption.  So, even those gains were taxed at the cap gain rate, the effect was that they had the potential to make more of the other income subject to the AMT rate because of the interplay with the AMT exemption phase-out.

The JCTA has increased the AMT exemptions and with a very large increase in the amount at which the phase-out begins that I put in a quote box below.  Because the phase-out of AMT exemption starts at a much higher level, this may mitigate or even eliminate the tax effect of including cap gains in AMTI that I described above.

As far as how the AMT credit works, it's a nonrefundable credit that is carried forward and is only able to be used in a year when that taxpayer isn't subject to the AMT. Most of my clients that are subject to AMT pay it every year and have not been able to use the credit. With your client's situation, it may be possible for him or her to utilize some of that though.

 

Quote

 AMT exemptions and phase-out thresholds:

  •  Married, joint (or surviving spouse): The AMT exemption for 2018 increases from $86,200 (old law) to $109,400.  The phase-out threshold increases from $164,100 (old law) to $1,000,000.
  •  Married, separate: The AMT exemption amount increases from $43,100 under old law to $54,700. The phase-out threshold increases from $82,050 to $500,000.
  •  All other individuals: The exemption amount for 2018 increases from $55,400 (old law) to $70,300. The phase-out threshold increases from $123,100 to $500,000.

 

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Thank you Judy for that great explanation.  With tax reform, I think it's possible that a lot of people will be able to use those AMT credits because so few taxpayers will be subject to AMT (at least I think so, there are so many moving parts).  Some exclusion items that are added back to arrive at AMTI are gone anyway--exemptions, misc itemized deductions, non-acquisition mortgage interest, limited SALT. All that will have to be added back is SALT, private activity bond interest and the standard deduction.  Raising the phase-out limits will excuse a lot of people from AMT, and people who make above those limits usually don't pay AMT because their regular tax rate is higher.  To me it looks like Congress just eliminated the AMT without calling it that.

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12 hours ago, SaraEA said:

Thank you Judy for that great explanation.  With tax reform, I think it's possible that a lot of people will be able to use those AMT credits because so few taxpayers will be subject to AMT (at least I think so, there are so many moving parts).  Some exclusion items that are added back to arrive at AMTI are gone anyway--exemptions, misc itemized deductions, non-acquisition mortgage interest, limited SALT. All that will have to be added back is SALT, private activity bond interest and the standard deduction.  Raising the phase-out limits will excuse a lot of people from AMT, and people who make above those limits usually don't pay AMT because their regular tax rate is higher.  To me it looks like Congress just eliminated the AMT without calling it that.

What about employee stock options.   Isn't this the biggest driver of AMT?

Tom
Modesto, CA

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From what I've seen with my clients, most employers have switched to "restricted" stock options.  These are added to W2 income in the year received. If the employee hangs on to them, they become eligible for cap gains rates if kept long enough, with basis being whatever was added to W2 plus expense of sale. Most of my clients in this situation ignore my advice and cash them the day they vest, some adding $200-300k to their income--all taxed at ordinary income rates.  How do people who already make $300k+ a year need that money so badly they can't wait a year?  I will never be in that situation so I guess I'll never find out.

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Well after the assistance of one of our members I was able to prevent the client from paying any AMT. Some day when I have a clearer head I will try to understand the mechanics of this alternative tax system.:wacko: Perhaps I can find a class at my local  community college that will clarify the workings of this tax. Clearly I will require the assistance of some college person to make it clear.

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