Post by 4aapl on May 18, 2021 9:30:09 GMT -8
For the last few years I haven't worried about the AMT. Making a more consistent but somewhat moderate amount doesn't trigger it, especially with the raised exemption recently. But last year I sold some stock for LTCG, enough to go above the levels.
The good thing is that the AMT uses the same discounted tax rates for LTCG as normal LTCG. So currently 15% is 15%, and 20% is 20%. The difference is what deductions you can still make, and how other things are taxed. For instance we had a little bit of income and short term gains that would normally be taxed in the 10% or 12% tranches. Instead, within AMT and above the exemption phase, that income was taxed at 26% (it can also be taxed at 28% depending on how much you make in this tranche).
This Schwab article says that these days the 3 times you normally get hit by the AMT is with very high household income (over $1M), a high level of capital gains (for us, diversifying our portfolio, but it can also be from selling a house, etc), or exercising qualified employee stock options.
www.schwab.com/resource-center/insights/content/amt-triggers
If you want more info, look at IRS form 6251. Section 3 is if you had capital gains, and like any "brain dead" steps, it's overly complicated. In short, it separates out your income and ST cap gains and taxes those at 26 or 28%, pulls out any LTCG and dividends that would be taxed at 0% and taxes them that way, pulls out the next batch of LTCG that would be taxed at 15% and calculates that, and then taxes any remainder LTCG at 20%. Then it adds them all up.
I swear there are a few extra steps in there that they don't really need, but it probably all falls back on some loophole or something. Why make it simple when you can make it complex?
FWIW, my general plan will be to limit any short term or normal income on years where I have an excessively large (ie above $1M, with these higher levels through 2025 before they revert back to lower levels). This isn't something we normally plan to do, but we have a house to sell, and I'd like to diversify about 40% of my AAPL shares in taxable accounts, so I might have a year or more of ugliness from an AMT perspective.
OTOH, if I just reframe it as a big donation to the betterment of the country with what it can spend this extra tax money on, then it's all good. It's not as targeted as giving it to a local school or nonprofit, but such is life. 26-28% doesn't sound like much, but add in both halves of social security, along with some other deductions and such phasing out, and you might be seeing the 46-49.8% taxes on certain income that we saw this year. I don't normally fully consider social security a tax since ideally you get some or all of it back in the long term, but in the short term it is money out the door.
Anyways, good luck out there. Personally, I prefer taxes that I know about going in, rather than am blindsided with. Hopefully this info makes it so fewer people are blindsided with the AMT, even if they are lucky enough to have a year at that lofty net income level.
(EDIT: Turns out the 49.8% is without adding in social security. Reverse-engineering form 6251, if hit by the alt minimum tax, every additional dollar of income and short term gains is taxed at a seemingly reasonable 26-28%. But, if the total there is below 80k, and you have a big LTCG gain (why you are dealing with AMT in the first place), it bumps up a dollar from the 0% tax to the 15% rate, and one from the 15% rate to the 20% rate. So really 0% to 20%. And then you add in the 3.8% for capital gains above 250k.
That gives a total (each of these are calculated off the whole initial number) of 49.8% (if in the "26%" bracket).
And that's before adding in 15.3% for the self-employment tax, if applicable. Again, I don't normally count SS, since ideally you get it back in the long term. But now you are talking about roughly 65% of additional income (ie working harder to make $30k instead of $20k). Talk about diminishing returns.
There is a slight (deduction of 50%) of the self-employment tax, so that helps a little. And it's slightly less if you aren't hit by the AMT, since additional income would be taxed at 10%/12%/22% instead of 26%. But you still have the double/triple/quadruple hit on taxes if your normal income (plus short term) is greater than your standard deduction or itemized deduction. So in the 12% bracket for normal income and ST gains, making $60k instead of $50k and using the standard deduction, that additional $10k would result in a (12%+20%+3.8%) 35.8% tax rate. It's not quite as bad, at a little over a third instead of nearly half. But it's still a decent chunk, though only additive when making a lot of LT gains, and in this example with a total income a little above $500k but below $1M.
Anyways, I thought that was interesting, and hadn't fully noticed that before that it could be so additive. It is an edge case that most people don't have to worry about, ever. But some of us, especially with large gains, do get hit by these edge cases once in a while.)
The good thing is that the AMT uses the same discounted tax rates for LTCG as normal LTCG. So currently 15% is 15%, and 20% is 20%. The difference is what deductions you can still make, and how other things are taxed. For instance we had a little bit of income and short term gains that would normally be taxed in the 10% or 12% tranches. Instead, within AMT and above the exemption phase, that income was taxed at 26% (it can also be taxed at 28% depending on how much you make in this tranche).
This Schwab article says that these days the 3 times you normally get hit by the AMT is with very high household income (over $1M), a high level of capital gains (for us, diversifying our portfolio, but it can also be from selling a house, etc), or exercising qualified employee stock options.
www.schwab.com/resource-center/insights/content/amt-triggers
If you want more info, look at IRS form 6251. Section 3 is if you had capital gains, and like any "brain dead" steps, it's overly complicated. In short, it separates out your income and ST cap gains and taxes those at 26 or 28%, pulls out any LTCG and dividends that would be taxed at 0% and taxes them that way, pulls out the next batch of LTCG that would be taxed at 15% and calculates that, and then taxes any remainder LTCG at 20%. Then it adds them all up.
I swear there are a few extra steps in there that they don't really need, but it probably all falls back on some loophole or something. Why make it simple when you can make it complex?
FWIW, my general plan will be to limit any short term or normal income on years where I have an excessively large (ie above $1M, with these higher levels through 2025 before they revert back to lower levels). This isn't something we normally plan to do, but we have a house to sell, and I'd like to diversify about 40% of my AAPL shares in taxable accounts, so I might have a year or more of ugliness from an AMT perspective.
OTOH, if I just reframe it as a big donation to the betterment of the country with what it can spend this extra tax money on, then it's all good. It's not as targeted as giving it to a local school or nonprofit, but such is life. 26-28% doesn't sound like much, but add in both halves of social security, along with some other deductions and such phasing out, and you might be seeing the 46-49.8% taxes on certain income that we saw this year. I don't normally fully consider social security a tax since ideally you get some or all of it back in the long term, but in the short term it is money out the door.
Anyways, good luck out there. Personally, I prefer taxes that I know about going in, rather than am blindsided with. Hopefully this info makes it so fewer people are blindsided with the AMT, even if they are lucky enough to have a year at that lofty net income level.
(EDIT: Turns out the 49.8% is without adding in social security. Reverse-engineering form 6251, if hit by the alt minimum tax, every additional dollar of income and short term gains is taxed at a seemingly reasonable 26-28%. But, if the total there is below 80k, and you have a big LTCG gain (why you are dealing with AMT in the first place), it bumps up a dollar from the 0% tax to the 15% rate, and one from the 15% rate to the 20% rate. So really 0% to 20%. And then you add in the 3.8% for capital gains above 250k.
That gives a total (each of these are calculated off the whole initial number) of 49.8% (if in the "26%" bracket).
And that's before adding in 15.3% for the self-employment tax, if applicable. Again, I don't normally count SS, since ideally you get it back in the long term. But now you are talking about roughly 65% of additional income (ie working harder to make $30k instead of $20k). Talk about diminishing returns.
There is a slight (deduction of 50%) of the self-employment tax, so that helps a little. And it's slightly less if you aren't hit by the AMT, since additional income would be taxed at 10%/12%/22% instead of 26%. But you still have the double/triple/quadruple hit on taxes if your normal income (plus short term) is greater than your standard deduction or itemized deduction. So in the 12% bracket for normal income and ST gains, making $60k instead of $50k and using the standard deduction, that additional $10k would result in a (12%+20%+3.8%) 35.8% tax rate. It's not quite as bad, at a little over a third instead of nearly half. But it's still a decent chunk, though only additive when making a lot of LT gains, and in this example with a total income a little above $500k but below $1M.
Anyways, I thought that was interesting, and hadn't fully noticed that before that it could be so additive. It is an edge case that most people don't have to worry about, ever. But some of us, especially with large gains, do get hit by these edge cases once in a while.)