Cape Blue

No, I showed the percentages on my W2 and then after filling to give people like Steerpike an idea of what AMT actually did and its impact. As I have said already, I know AMT was paid, it is on line 45 and my accountant told me I was liable, I have since looked up the details of AMT and realize I was liable and that the amount on line 45 was correct.

All I was pointing out with this thread was that, unlike PAYE in the UK, you can have all your income from one company and ask for no allowances, and still find yourself with a very hefty extra tax bill due to AMT at the end of the year.

What I don't know is what is next years "AMT" going to be for me, is there yet another extra tax system that i might fall foul of that i don't know about and my company doesn't take into account. As it is, I am going to have to ask my company not only to give me zero allowances, but also to take extra money each month to align my Fed deductions with a likely AMT going forwards.

Michael

This will be the last time I'll respond. AMT calculates your total tax as 26% on you first $175,000 of income after you exclude $47,450 of your income. Above that amount, AMT calculates 28% total tax on income above that amount. AMT will only be charged if tax calculated from the tax brackets is less than that amount. So indicating that you paid 29.93% federal income tax and that incudes AMT doesn't make any sense because AMT could never be charged on taxes paid above 28% of your total income even if you made $1 billion.

Cape Blue

You are partly correct but I obviously didn't make myself clear in my earlier posting. Depending upon ones earnings AMT is also at 28% with zero exclusions -which is exactly what I said on an earlier post. I also pointed out that the 29.93% was calculated after my pension contributions (i.e. net of my pension) and when I added these back in (again, AMT at 28% with zero exclusions) it came to the 28% that is the AMT.

Michael

I said I wasn't going to respond any more but I'll try one more time. There is an automatic exclusion of $47,450 for a single person for AMT so eliminating that exclusion doesn't make sense. Secondly form 1040 doesn't even know about your pension and could care less (assuming you are referring to a 401k or IRA) until you start to withdraw it. That is why your W2 does not included it as taxable income but only notifies the IRS that you have contributed that amount to a tax free plan so that if you withdraw it, it will be taxable.

So removing this or adding that has nothing to do with AMT.

Example:

Total reportable taxable income is $257,450
Subtract $47,450 for an AMT income of $210,000
26% of $175,000 equals $45,500
28% of $35,000 equals $9,800
If you pay less than $45,500 + $9,800 = $55,300 in federal income taxes, ATM may possibly come into play.
In this case, AMT can come into play if your effective tax rate is less than 21.48% of your taxable income.

In this case, you would need a large amount of long term capital gains or qualified dividends which are taxed at the maximum 15% and/or large deductions to get the effective tax rate to be below 21.48% or $55,300.

I have paid AMT several times in my life. The last time it occurred was when I sold a property and had $180,000 worth of long term capital gains and I paid $650 in AMT. Many people in California also get hit with AMT because they have mortgage interest deduction on a $800,000 loan, property tax deductions, and state tax deductions. All of a sudden they have $75,000 worth of deductions and the AMT exclusion for a married couple filing jointly is $74,450. Because they have so many deductions, their may not be taxed at a high enough effective tax rate using the marginal tax rates to not pay AMT.

Since AMT only eats away at deductions and exemptions, last year the Fortune 400 richest billionaires only paid a 16.6% effective federal income tax rate because after their deductions were taken away, most of the rest of their income was long term capital gains that was taxed at 15%.

Originally when AMT was adopted in the 1970s, it only affected the richest who had large deductions and/or large long term capital gains. The purpose was to try to make sure if they got a low effective tax rate on million dollar incomes, the government would take away their deductions and exemptions first. However problems exists today for the upper middle class with large deductions and/or large capital gains since the government never inflation indexed the amounts of the AMT exclusion. If the AMT exclusion would have been inflation indexed, the exclusion would likely be 3-4 times the current amount and the upper middle class would never be affected.

Cape Blue

Without boring everyone else on the details of AMT, there is NOT an automatic exclusion of $47,450 - it all depends upon the amount you earn in the year, some people have ZERO exemption.

I am content that I understand why I came into AMT and the amount of tax paid. But thanks for your input regardless.

Jscl

I'm a bit late to the party and you've probably moved on, but OP, for high earners in CA it's often the CA tax payments that make AMT come into pay.

The CA state income tax you pay in the year is deductible for regular federal tax, but not for AMT. If your income is high (which it must be to have no exclusion) most likely a lot of CA tax was withheld from your pay and bonus, and you wouldn't have to pay regular tax on that assuming you itemised. As AMT does tax that, and at 28% if you're a high earner, suddenly you fall into the AMT crowd.

So the purpose of my (late) post is that assuming your financial situation is similar next year you will most likely need to pay AMT again. You might want to either increase your withholdings or pay estimated taxes so you don't get stuck with a penalty for underpayment at the end of the year.

Cape Blue

Yep,

all depends upon the bonus though and I suspect it will be significantly lower this year than last so I may avoid AMT. I'll probably ask for some additional withholding just in case.

Michael

My apologies. After searching the internet trying to determine if the AMT exemption can be eliminated with no luck, I looked at AMT form 6251 to see if I could figure out if the exclusion can be eliminated. I tried looking at that form before but my brain exploded. The reason that it is so complicated is that not all deductions are excluded, long term capital gains can only be taxed at a maximum of 25%, certain types of expenses may be partially excluded, and it references worksheets and other forms.

I can see that there was a major lobbying effort by the super rich when this bill was passed back in the 1970s. For example state and local taxes are phased out under AMT but charitable contributions and unreimbursed business expenses aren't. This makes sense for the super rich because they normally claim their primary residence in a state without income taxes (about the only billioniare that I've heard of that doesn't do that is Warren Buffet) even though they live and work in another state (pay state income tax on their earned income in the state they work but no state taxes on unearned income). They also make a large amount of their income through long term capital gains so capping that out at 25% is important. Charity is also a big thing with the super rich where they can donate a painting appraised at $10 million but only has a real value of $1 to $2 million. Finally unreimbursed business expenses can be important for the super rich to write off seminar/vacation trips for the family.

Finally getting to the phase out of the AMT exemption. For a single person the AMT exemption starts to phase out at $112,500 at a rate of $1 for every $4 of income above $112,500 and is completely phased out at $302,300. For married filing jointly, the phase out starts at $150,000 at a rate of $1 for every $4 of income above $150,000 and is completely phased out at $439,800.

So it appears that for a single person the AMT tax rate approaches 28% on income above $302,300 (about 27% at $302,300 but creeps higher as the income gets higher unless long term capital gains are included which are taxed at a maximum 25% rate).

Yorkieabroad

Depending on how much hassle that is with HR (never worked for a company here, so don't know), you can also make personal deposits by setting up an account at www.eftps.gov

Michael

If the payroll department won't do that, you just change your W4 to take out additional fixed amount for taxes from your salary for a few months. Usually when I exercised my stock options, that is what I did and my check was pretty low for a few months.

Yorkieabroad

Fair enough - like I said, I've never worked here, so didn't know how much paperwork was involved. In the other countries where I have worked, asking HR to change the amount of deductions would have thrown them into a blue funk!

Michael

At work, I've changed my W-4 many times when something unexpected occurred and then changed it back when I corrected the issue.

Normally the government wants you to file estimated quarterly taxes when you sell some property, stock, or perform outside contractor work that will cause your tax burden to increase by more than $1,000 for the year. I never bothered with that but just calculated how much extra tax I would owe at the end of the year and changed my w-4 to reflect those extra taxes.

Normally you can use a online tax calculator such as the following to get a fairly accurate estimate of the total tax that will be owed. Then you multiply the federal income withheld withheld per pay stub by the number of pay periods per year and subtract that amount from the amount indicated in the tax calculator and withhold that extra amount over the number of pay periods that is desired changing the W4 back to normal after the period is over.

http://www.dinkytown.net/java/Tax1040.html

The W-4 is used by the company payroll department or outside payroll service and is entered in their computer to adjust the withholdings and is not sent to the government. The computer uses tables provided by the government to calculate withholding and if there is an additional amount indicated on the W-4, that will be added to the amount determined by the tables. It is a very painless task for the company or outside payroll service.

Yorkieabroad

That's what I use eftps.gov for.

Vicky88

We usually get a small hit for AMT every year. It's not because we are mega wealthy, but due to the fact that California taxes are so high and wages are higher in California than in most places to cover the high cost of living. We have no other deductions other than state tax paid.