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.
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.