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details of paying AMT Page 2 of 2
For people who rely on various tax deductions to lower their tremendous taxes, the AMT forms a limit on how much of the deductions that people can effectively use. The AMT is affecting particularly people like us - wage earners raising a family with compassion in charity work. So a clear understanding is essential. The lack of insightful descriptions online prompts me to share my thoughts here. Smartmoney.com: Tax Guide: The Alternative Minimum Tax (www.smartmoney.com/tax/filing/index.cfm?story=amt) provided one of the better explanations that I had used. To visualize the AMT, I first reformulate the AMT rules, using numbers associated with Joint Filers, but one can easily modify them for other situation. The insights would remain the same. AMT Rules: - Phase-out exemption for Income in [$150K, $382K]
- Taxable amount = Income - Exemption
- AMT: First 175K of the Taxable amount is taxed at 26%, excess is at 28%.
I simplify the AMT calculations for various income ranges, and also provide the assoicated range of the effective rate, defined as AMT/Income. - Income < $58K, AMT = 0.
- Income in [$58K, $150K], AMT = 26% (Income - $58K). Effective rate range: [0, 16%]
- Income > $382K, Exemption = 0, AMT = 28% (Income - $175K) + 26% ($175K) = 28% (Income - $12.5K). Effective rate goes from 27.1% to 28% asymptotically.
- For $150K < Income < $382K, with a phase-out exemption:
- Exemption = $58K - ( Income - $150K)/4 = $95.5K - Income/4
- Taxable amount = 1.25 x Income - $95.5K
- AMT = 26% (Taxable amount) + 2%(Taxable amount - $175K) (if TaxAmt exceed 175K)
= 26% ( 1.25 x Income - $95.5K ) + 2% (1.25 x Income - 95.5K -175K) (if Income> 270.5K/1.25)
= (32.5% Income - $24,830) + (2.5% Income - $5,410) (if Income >216.4K)
- Hence for Income in [$150K, $216.4K], AMT = 32.5% Income - $24,830 = 32.5% (Income - $76.4K). Effective Rate for this range is [16%, 21%].
- For Income in [$216.4, $382K], AMT = 35% Income - $30,240 = 35% (Income - $86.4K). Effective Rate goes from [21%, 27.1%].
Two quick examples: - For $200,000 income, AMT = $40,170, effectively 20% of income.
- For $250,000 income, AMT = $57,260. This is 22.9% income.
BTW, learning the above, I find that an online AMT Tax Calculator at Mcalculator.com (http://mcalculator.com/mortgage_ira_tax_effects_calculators/amt_tax.html) incorrectly calculates the AMT (Scrutiny reveals that it uses outdated exemption constants, e.g. $46K rather than $58K for joint filers, as shown in its javascript source code.)
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