AMT Causes a Few More Capital Gains Tax Rates!

We had a reader send in the following question:

“Do long term capital gains count in determining AMT? And thus potentially increasing 15(20) percent effective rate?”

We wrote a post a couple of weeks ago about there being ten different long-term capital gains tax rates beginning in 2013.  Well, we can probably at least two or three more for the effect of Alternative Minimum Tax (AMT) on our effective rate calculations.

The good news is that AMT taxes long-term capital gains and qualified dividends at the same rate for federal income tax purposes.  The bad news is if your income is at a certain level, each additional dollar of capital gains phases out 25% of your allowed AMT exemption.  Without getting too technical, this means that for 2013, if your AMT income is between roughly $75,000 to over $300,000 depending on your filing status, this may apply to you.

For example, assume a married couple is in the range where the phase-out applies and their adjusted gross income on the tax return is $250,000, with $10,000 of capital gains.  Since they are below the net investment income tax (NIIT) threshold, their capital gains tax rate is 15%.  However, this extra income caused $2,500 of their AMT exemption to phase out and the net effect on this is either $650 or $700 (depending on their AMT rate).  This makes their effective capital gains tax rate either 21.5% or 22%. 

Now if we bump their income over the NIIT threshold, this increases their net capital gains tax rate by another 3.8% pushing it up to 25.3% or 25.8%. 

Now on top of it, if we have the 3% of itemized deductions apply to their AMT situation (sometimes it won’t), then the final maximum rate could be almost 1% higher.

As you can see, depending on their overall AMT situation, their net capital gains tax rate could be as low as 15% or as high as almost 27%.  Since the AMT exemption is usually fully phased out when the maximum 20% capital gains tax rate kicks in, we won’t quite get over 30% due to AMT.

Since it looks like we can have three additional capital gains tax rates due to AMT, I think we are not at an official bakers dozen (and it is really more than that based on your number of personal exemptions claimed on the return).