Personal Finance: Ask the Experts

Get advice on money matters from The Bee's Claudia Buck and a panel of local experts

August 18, 2013
Why do I have to pay alternative minimum tax?

Q: I have never qualified for the alternative minimum tax in past years. This year I retired and sold my house, which I had to report capital gains on. Do I have to pay Alternative Minimum Tax just because the capital gains pushed me into that tax bracket? Or is Alternative Minimum Tax only on Income received, not including capital gains (since it's only a one-time source of income)? Thanks for your help.

Diane
Elk Grove, CA

A: The alternative minimum tax (AMT) is a separate tax calculation that was originally designed to force high-income taxpayers who were taking advantage of certain tax breaks to pay a minimum level of tax. The tax uses two tax rates: 26% on the first $175,000 of "alternative minimum taxable income" and 28% on any amount over that.

Longterm capital gain income gets taxed at the same 15% rate (20% for high income taxpayers starting in 2013) as for regular income tax. IRS Form 6251 is used to calculate the AMT.

Alternative minimum taxable income is similar to taxable income for the regular income tax, except that certain deductions, such as state income taxes and real estate taxes, are not deductible in calculating it. Also, certain "tax preference items," such as depreciation expenses, are calculated in a different manner resulting in lower deductions for AMT purposes. Personal exemptions are not deductible in calculating alternative minimum taxable income, either.

For 2012 there was a $50,600 exemption amount ($78,750 if married filing a joint return) in calculating alternative minimum taxable income, so most lower and middle income taxpayers are not affected by the AMT. The exemption "phases out" as your income goes up, which has the effect of increasing the tentative AMT. Tentative AMT is calculated by applying the AMT tax rate to your alternative minimum taxable income.

The way the AMT works, if your tentative AMT is higher than your regular income tax, you pay the difference in addition to your regular income tax. In effect, your tentative AMT becomes a floor below which your federal income tax liability cannot fall.

Without seeing your return, my guess is the capital gain income pushed your income up. When coupled with reduced AMT deductions (no state income tax deduction, no real estate tax deduction, no personal exemptions), it caused your tentative AMT to be higher than your regular tax, resulting in you having to pay AMT. If the capital gain income was large enough, it may have caused the AMT exemption amount to be reduced by the phaseout, effectively increasing your tentative AMT.

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Meet Our Financial Experts

Claudia Buck

Claudia Buck is The Sacramento Bee's personal finance columnist. Read all her columns here. Contact her at cbuck@sacbee.com

Terri Carpenter

Terri Carpenter offers advice on job hunting, retraining and career counseling. Carpenter works at Sacramento Works Inc., the career and job training arm of the Sacramento Employment and Training Agency (SETA). With 15 years in the field, she has hands-on experience with everyone from first-time job seekers to career professionals seeking advice after a layoff or looking for a mid-career change. Ask her a question.

Carlena Tapella

Carlena Tapella is a partner in the law firm of Webb & Tapella Law Corp. in Sacramento. The firm specializes in estate planning and probate, such as estates, trusts, conservatorships and litigation. She is a past president of the Sacramento County Bar Association's Estate Planning & Probate Section. Ask her a question.

Kimberly Foss

Kimberly Foss, certified financial planner, is the founder of Empyrion Wealth Management in Roseville. With nearly 30 years in the financial industry, her clients include women in transition, small business owners, retirees and "pre-retirees." Ask her a question.

Jesse Weller

Gregory Burke, a CPA and tax expert with John Waddell & Co. in Sacramento since 1984, worked as an IRS tax auditor for six years. He’s a past chairman of the California Society of CPAs. Ask him a question.

Daniel Tahara

Daniel Tahara takes your questions about California taxes. Tahara, a spokesman for the state Franchise Tax Board, has 10 years of experience as a tax auditor. Ask him a question.



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