More AMT Insights
I recently wrote a brief introduction to the Alternative Minimum Tax (AMT) and also highlighted what Congress has done to “fix” the AMT. Thus, I thought I’d point out a few more couple of articles on the topic:
» J.D. Roth of Get Rich Slowly put together an overview of his own.
» The Fine Art of Money shared some thoughts on why you should care about the AMT.
» Kay Bell from Don’t Mess With Taxes talked about the recent AMT patch.
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One thing rarely mentioned in the AMT discussion is where you live. Our household income is well north of $100k, we have a huge amount of mortgage interest, two kids, and a hefty property tax bill.
What we don’t have is state income taxes. Assuming all else stayed equal, if we lived in a state with an income tax I’m sure we’d find ourselves ensnared in the AMT trap.
While not a feasible option for many, for those who are able, moving to an income-tax free state may free you from the grasp of the AMT.
Comment by Brion — Jan 4th 2008 @ 12:41 pmBrion: If that’s what you’re worried about, you could always fail to deduct your state income taxes.
True, but you’re still out the state income taxes you paid and then you’d also be out the 20% (or whatever your effective tax rate) “federal rebate” on the state taxes.
But, I agree, if it helps you avoid the AMT probably better to not deduct the state taxes than to pay the AMT.
Comment by Brion — Jan 4th 2008 @ 1:01 pmHaving lived in a non-state-income-tax state in the past, my experience was that a lot of the “savings” of not having an income tax were made up by a high sales tax. And since sales tax is deductible (but causes similar AMT issues, I think), are you skipping that deduction?
Another thing that can easily trigger AMT are capital gains, capital gains distributions or anything that makes your income high enough one year that the exemption starts to phase-out. Additionally, if you are in that situation, and the capital gains is the one-time thing, you cannot get credit next year as next year you’d be well below AMT. Do long-term capital gains may still be taxed at 15%, but because your income is higher, oops, you pay more on the rest of your income…
Lots of kids can trigger AMT as well because of course only rich people have kids much as only rich people live in high tax states. And it is not just income taxes, property taxes factor in as well.
Another entertaining thing is if you get options at work. Even though I’ve never had those, one thing I learned from reading about AMT is that you should always sell immediately after exercising options. If you wait for a year to get long term rather than short term capital gains and the stock drops in the meantime you may owe a lot of money you don’t have. Happened to a number of ex-millionairs-on-paper after internet bubble burst.
Comment by kitty — Jan 4th 2008 @ 1:19 pmThat’s an excellent point - and got me thinking a bit more about it.
My wife grew up in MN so I looked at what a couple making $150k/year (AGI) would pay in state/local taxes - it looks like it would be about $10k.
I’ll have to look tonight at what our sales tax deduction was in 2006, but I want to say it was around $2,000. Then it dawned on me that property taxes are also generally higher in non-income-tax states. But, even if I assume our property taxes are $2,500 higher than they would be in an income-tax state I think we’re still coming out a few thousand dollars ahead (and a few thousand dollars further away from the AMT line).
Comment by Brion — Jan 4th 2008 @ 1:31 pmThe stock option issue is a great example of why the AMT needs to be replaced or revamped - that just ruined a lot of people - a lot of people who had relatively modest incomes.
Comment by Brion — Jan 4th 2008 @ 1:37 pm