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I need some help understanding what is happened here for 2013. I completed a "what if" in TT and was surprised to see that AMT was triggered - by LT cap gains, apparently.

I expected a 25% marginal tax bracket and 15% LT cap gains. Instead I seem to get AMT at 27%? (That 15% cap gain rate was an important consideration when I sold the stock. An alternative was a Roth distribution. Or even a mortgage. I thought I was choosing instead a 15% cap gain rate. NOT???)

I'd really like to better understand AMT. It seems as though my cap gains are effectively taxed at 26% under AMT for 2013?

Caveat. This is NOT a normal year. But here are the #s for 2013 in hopes that someone can parse it out for me re what happened.

LT cap gain: 71,435.

RMD: 71,322.

Taxable SS: 37,137.

Tot Inc: 175,019.

AGI: 175,019.

St Deduct: (14,600).

3 Exempts: (11,700).

Taxable Inc: 148,719.

Tax: 21,885.

AMT: 3971.

Tax: 25,856.

>>>>>

My attempt at AMT:

AGI: 175,019

Exempt: 80,800

= : 94,219

And, 94,219 X 26% = 24,497.

OR, 94,219 x 27% = 25,439. Which is closer to the 25,856 above #.

27%???

Is the effective cap gain rate 27% in this example? Did the AMT exemption phase out apply, too? Or what?

Thank you.

ML

ps Hindsight. I should have run "what if" before the sale. I just never DREAMED that the sale would trigger AMT.
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I completed a "what if" in TT and was surprised to see that AMT was triggered - by LT cap gains, apparently.

It could happen. However, your LT gains are still taxed at the LT rate. The effect of AMT is on deductions and the rate charged on your other income.

You can see how it all falls out on Form 6251.

Phil
Rule Your Retirement Home Fool
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OK. In TT "what if" I backed out capital gains incrementally until relieved of AMT.

Relieved of AMT at cap gain of 48,795. Which means I backed out 22,640 of cap gain.

At 71,435 cap gain. Tax on full taxable income = 25,856

AT 48,795. Tax on full taxable income = 18,597.

Tax Difference = 7,259 on the 22,640 cap gain backed out. Yikes.

7,259/22,640 = 33% "effective" cap gain in AMT.

Wow. I really blew it. Roth was available. But I didn't want to use the Roth to save 15% cap gain tax. However, given the AMT status that I did NOT anticipate, it seems like I missed a GREAT opportunity to use the Roth to avoid AMT and an "effective" 33% cap gain rate on that 22,640 cap gain.

Sheesh. Lesson learned. Use "what if" BEFORE transacting. ALWAYS.

I HOPE that this sorry tale helps someone else avoid this situation.

Stupid. Stupid. Stupid.

ML
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We're missing some info here.

LT cap gain: 71,435.

RMD: 71,322.

Taxable SS: 37,137.

AGI: 175,019.


When I add those three, I get 179,894.


St Deduct: (14,600).

3 Exempts: (11,700).

Taxable Inc: 148,719.


So you're married, both of you are over 65, and you have an additional dependent in the house. I'm still off by the difference in AGI, but I'll go with your numbers anyway.


Tax: 21,885.

Working through the schedule D tax worksheet (and adjusting the 2012 worksheet for 2013 tax rates), I get 21,894. Close enough for this exercise.


My attempt at AMT:

Let's just start over on that.

We'll assume your AGI is the same as your AMTI (which is fairly reasonable in your case).

The phase out of your AMT exemption begins at 153,900 of AMTI. You're 21,119 over that. And you lose $1 of exemption for every $4 over the threshold. So divide 21,119 by 4 and we get $5280 of lost exemption and a remaining exemption of 75,520. So we've got:

AMTI 175,019
Exemption 75,520
AMT taxable 99,499

We still get the benefit of the 15% rate on your LTCG. So that leaves 71,435 taxed at 15% and 28,064 at 28% (some of that will be at 26%, but I generally just use 28% for planning). Doing the math, I get 10,715 plus 7,858 for a total of 18,573 of AMT.

That's less than the regular tax, so I'm not coming up with any AMT at all. I'd take a closer look at the details of the TT "what if" scenario and see how it's coming up with a lot more AMT.

--Peter
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Peter

Thank you very much for digging into my #s. I'll go back to TT and look it over again. Redo my #s. It may take a while.

I sure hope you're right.

ML
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Oh Wow, Peter. I think you're right! I checked your numbers and could follow them. I then went back to TT "what if". Nothing appears wrong there except that it shows AMT of roughly $4000. It must be an error in the module.

In years past, I learned to ignore AMT amount in the "what if" module. It would be eliminated with the year end patch. This year I guess I figured that since AMT was permanently fixed - that the TT "what if" module would be accurate as regards AMT. Maybe I should try running a TT update? and see if that fixes the problem.

Anyway, it looks to me like you're right. Whew. So long as I'm paying 15% cap gain, that's fine. And I can't avoid the 25% rate this year, so that's fine. Such a RELIEF!

Re the #s that you so kindly deciphered. Yes. I didn't show $125 and ($5000) in my list but included them in AGI and Taxable Income. Thank you for going with my #s anyway. And yes. 2 of us over 65, married, and one additional exemption.

The additional exemption? He is a non related dependent. (I forget the exact term now.) He does not live in our home, he made less than the ceiling amount (perhaps $500), and we provided his support. I thought I had a choice of deducting his medical expenses or taking an additional exemption, not both. I chose the exemption. Is that correct?

I am so relieved now that you have explained why we are not in AMT territory paying an additional $4000 as TT indicated. HUGE relief. I can't tell you.

THANK YOU.

Turns out Phil was right, too. Thank you Phil.

ML
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Oh Wow, Peter. I think you're right!

My gut feeling was that you weren't in AMT territory, so I ran a few numbers to see. And I knew you had the AMT calc wrong, so I wanted to address that.

The additional exemption? He is a non related dependent. (I forget the exact term now.) He does not live in our home,

Let's stop right there. The only dependent that might not live in your home is a parent. For anyone else, they have to live in your home to be a dependent.


he made less than the ceiling amount (perhaps $500), and we provided his support.

Those are a good start, but there are other tests.

I thought I had a choice of deducting his medical expenses or taking an additional exemption, not both. I chose the exemption. Is that correct?

No. If they're a dependent, you get the exemption. AND you can also deduct medical expenses for dependents.

If you want to dig into that further, I'd suggest starting another thread.

--Peter
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In years past, I learned to ignore AMT amount in the "what if" module. It would be eliminated with the year end patch. This year I guess I figured that since AMT was permanently fixed - that the TT "what if" module would be accurate as regards AMT. Maybe I should try running a TT update? and see if that fixes the problem.

Or just take a look at the 6251 that TT produces and see whether its numbers match Peter's for the exemption.

The additional exemption? He is a non related dependent. (I forget the exact term now.) He does not live in our home, he made less than the ceiling amount (perhaps $500), and we provided his support. I thought I had a choice of deducting his medical expenses or taking an additional exemption, not both. I chose the exemption. Is that correct?

Oops. The term you couldn't come up with is, I believe, Qualifying Relative, who oddly enough doesn't have to be related to you. However, this person doesn't qualify as your dependent because he is not related by blood or marriage to you or your spouse and didn't live with you the entire year. You can deduct a dependent's medical expenses and even the medical expenses of some people who don't meet all the requirements of being a dependent. However, in the case of this person, you can claim neither.

See Publications 501 (dependency) and 502 (medical expenses). The form for amending prior returns is the 1040X.

Phil
Rule Your Retirement Home Fool
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The only dependent that might not live in your home is a parent. For anyone else, they have to live in your home to be a dependent.

You're thinking of the qualifying person for Head of Household filing status, not the requirements for a dependent. In addition to parents there are other relatives who don't have to live with you. However, someone unrelated by blood or marriage must live with you the entire year to qualify as a dependent.

Phil
Rule Your Retirement Home Fool
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You're thinking

Let's stop there. Ascribing to me the ability to think is, on occasion, a significant leap of faith. :)

And in the case of dependency issues, that leap is unwise. If it's not a kid living at home or at college, I'm pretty useless. However, I do know how to use resource materials, and lean on them very heavily for dependency and Head of House issues.

Hence, my suggestion to leethan to start a new thread so that I may gracefully bow out of that discussion. ;-)

--Peter

PS - And I note he has already started up a thread, which I will read and learn from. Again.
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