Monday, May 12, 2014


Recipients of Social Security and Railroad Retirement benefits are not the only taxpayers who are screwed by the US Tax Code (see this post). 

Most of my clients are from New Jersey.  I have several two income families whose W-2 incomes are inflated because of the high cost of living and whose biggest tax deduction is the combination of real estate and state income taxes.  As a result, they are often victims of the dreaded Alternative Minimum Tax (AMT).

Taxes of any kind are not deductible in calculating AMT, and neither are personal and dependent exemptions, home equity interest, or Miscellaneous Expenses subject to the 2% of Adjusted Gross Income (AGI) exclusion (employee business expenses, investment expenses, tax preparation costs).

Here is another example where the tax cost of capital gains and qualified dividends is more than the advertised 0%, 15% or 20% maximum tax rate.

Long-term capital gains and qualified dividends are taxed separately at 0%, 15%, or 20% in the actual calculation of the AMT (page 2 of Form 6251) – but this income is included in AGI and therefore increases Alternative Minimum Taxable Income (AMTI).  The AMT exemption is reduced by 25% of the amount AMTI exceeds $153,900 for a married couple filing jointly.  So $10,000 of long-term capital gain could cost $2,150 and not $1,500– 21.5% and not 15% - or more because it reduces the AMT exemption, and increases the amount subject to AMT, by $2,500 ($10,000 x 25% - $2,500 x 26% = $650 + $1,500).

We are told that the AMT tax rates are 26% and 28%.  But for couples whose AMTI exceeds $153,900 (half of that for those filing separately and $115,400 for unmarried taxpayers) the effective tax rate on additional AMTI is actually 32.5% or 35% because of the reduction in the AMT exemption.  Additional income of $10,000 from any source other than capital gains or qualified dividends could cost $3,250 or $3,500 and not $2,600 or $2,800.

Of course the best solution to this problem is to do away with the dreaded AMT altogether in a complete rewrite of the Tax Code. 


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