Wednesday, April 30, 2008


As I have blogged here before - the various “maximum” tax rates are not always what they are “advertised” to be.

The maximum AMT tax rate is supposed to be 28%. The maximum capital gain tax rate is supposed to be 15%. However, as you will see from the comments below, taken from an explanatory note sent to a client with his finished returns (a GD extension) - “it ain’t necessarily so”.

You were once again a victim of the dreaded Alternative Minimum Tax (AMT). While the ‘advertised’ maximum AMT tax rate is 28%, because of the “phase-out” of the AMT exemption you actually pay a flat 35% tax on all of your AMT taxable income.

For each $1,000.00 of additional income you reduce your AMT exemption - and increase your ‘Alternative Minimum Taxable Income’ - by $250.00. $1,250.00 x 28% = $350.00. So $1,000.00 of income costs $350.00 in ATM – hence 35%.

While we are told that qualified dividends and capital gains are taxed at a maximum 15% rate, under AMT in your situation this becomes 22%. $1,000.00 of capital gains reduces your AMT exemption by $250.00. The $1,000.00 is taxed at 15% ($150.00) – but the $250.00 is taxed at 28% ($70.00). The $1,000.00 cost you $220.00 in additional tax ($150.00 + $70.00) – hence 22%.”

Perhaps the most unfair example of this concept is the case of Social Security benefit recipients. In many situations, as I have explained in client memos over and over again, “for every $1.00 in additional income you are taxed on $1.85”.
So a Social Security or Railroad Retirement beneficiary in the normal 15% tax bracket could pay an effective 27.75% tax on additional ordinary income and 17.75% on capital gain income! As taxable Social Security increases AGI, which could affect many other deductions and credits, the effective tax cost might end up being even higher in some cases.

You should keep this in mind when doing projections and estimates of the tax consequences of financial transaction you are considering.

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