Do I understand AMT?

Taxes-paid deductions are lost (and state tax refunds are generally not taxable if they resulted from a year when AMT was paid). Miscellaneous

No. AMT still allows regular capital gains rates, although basis may be different. W-2 income receives no special treatment, it is lumped with your other ordinary income. AMT is essentially a flat tax with a relatively high exemption amount (based solely on filing status, not the number of persons claimed under regular tax) and no standard deduction.

Fundamentally, as corrected above. There are lots of other details, involving depreciation, foreign taxes, incentive stock options, etc.

Also, some regular tax credits are not allowed under AMT, exactly which ones are frequently subject to tinkering by Congress (for example, up until the last minute, the Hope/Lifetime Learning education credits were not going to be allowed to reduce regular tax below AMT for 2007).

-Mark Bole

I know your statement above is correct, but since the cap gain is added to income and AMT rises, there comes the feel of the LT cap gain rate being treated as though it were 22.5%. i.e. when in the AMT zone, add $10,000 of LT cap gain, and however the calculations ripple, I see a rise in tax due of $2250. Thus my inclination to remark "20% cap gain rate? so what? I pay 22.5% now".

This is in a similar category to my 'phantom tax rate' created by the incremental taxing of social security.

Joe

For many people, the mortgage interest deduction is the biggest deduction, and it is allowed. The home equity deduction may be limited (I think it is allowed if you used it to purchase or improve your main or second home). For some people, charitable contributions are the largest, and they are allowed under AMT. For some odd reason, part of the medical deduction is subject to AMT.

Long term gains and qualified dividends are still taxed at 15%. However, these items increase AGI, and therefore reduce the AMT exemption (or rather they increase the phaseout of the exemption). Thus, you may end up paying 28% on your entire AMT taxable income without any exemption. For this matter, these items also reduce the normal exemption and itemized deduction by increasing the phaseout (but in 2010 itemized deductions will not be phased out).

Due to the phaseout, there's a large range where the actual marginal rate is quite a bit higher.

Seth

Do you mean, higher than the regular tax marginal rate? I recall in recent years graphing results where the two lines (regular vs. AMT) dance with each other over a large range...

-Mark Bole

(Note: major redaction.)

I keep noticing these references to 2010 -- as if it were the "promised land."

What congresscritters have given, they may take away. Shouldn't we always add a qualifier, such as "under current law"?

Seems very likely the 2010 rules will be revised once the new administration gets around to revising tax law -- which will probably be sooner, rather than later.

Bill

If you are the AMT exemption phaseout zone, your ordinary AMT income will be subject to the 26% rate or the 28% rate (the phaseout zone straddles the AMT brackets). The phaseout is losing $25 of AMT exemption for every $100 you're over the threshold. Therefore, if your ordinary AMT income is in the 26% bracket, the phaseout increases your marginal rate by $25/$100 * 2600bp = 650bp. If you're in the 28% bracket, your marginal rate is increased by $25/$100 * 2800bp = 700bp.

In other words, if you're in the 26% AMT bracket and in the phaseout zone, then the actual marginal rates you will experience are: Ordinary income = 26% + 6.50% = 32.50% LTCG = 15% + 6.50% = 21.50%

And if you're in the 28% AMT bracket and in the phaseout zone, the actual marginal rates you'll experience are: Ordinary income = 28% + 7% = 35% LTCG = 15% + 7% = 22%

A few years ago David Cay Johnston at the NYT did a tax piece about this very thing. Dunno if it's available in the free archives or not.

-- Rich Carreiro snipped-for-privacy@rlcarr.com