Up to the end of 2012, there had been news articles every year saying if Congress didn’t act how many millions of taxpayers would be caught by the Alternative Minimum Tax (AMT). Every year, Congress came to the rescue with a patch, saving those millions of taxpayers from the claws of AMT.
They got tired of doing that. In January 2013, Congress passed American Taxpayer Relief Act of 2012, which permanently indexed the AMT for inflation, in addition to making most of the Bush tax cuts permanent.
When Congress did the annual patches, they only adjusted one number: the AMT exemption amount. The American Taxpayer Relief Act indexed for inflation all three numbers used in the AMT calculation:
- the AMT exemption amount
- the AMT exemption phaseout starting point
- the 28% AMT rate breakpoint
The same law also (re-)introduced personal exemptions and itemized deductions phaseouts for upper-income taxpayers. As a result, now fewer taxpayers pay AMT. Those who still pay AMT pay less AMT (although not less total tax).
Those who still pay AMT also fall into an AMT exemption phaseout range that grows wider over time. Under AMT you get a big bucket of exemption in lieu of your personal exemptions and itemized deductions (except mortgage interest and charitable donations for the most part). That exemption is subject to phaseout. As you have more income, you also start losing that exemption, until you lose all of it. Between starting to lose the exemption and losing all of it, that’s your phaseout range.
When you are in the phaseout range, your marginal tax rate under AMT is 6.5-7% higher than the statutory 26% and 28% rates. Your marginal tax rate for qualified dividends and long-term capital gains is also 6.5-7% higher. Combined with the 3.8% Medicare surtax on investment income, the tax rate on qualified dividends and long-term capital gains can be as high as 30.8%, which isn’t much lower than the tax rate on income.
Here are the AMT tax brackets for different income levels for 2013 and 2014. The income numbers in the table are Alternative Minimum Taxable Income (AMTI), which for most taxpayers equal to AGI minus mortgage interest and charitable donations. QD & LTCG stands for qualified dividends and long-term capital gains. The two phaseout ranges are shaded in gray.
Single or Head of Household – 2013
| AMTI | Income | QD & LTCG |
|---|---|---|
| $0 – $51,900 | 0% | 0%/15% |
| $51,901 – $115,400 | 26% | 15% |
| $115,401 – $208,200 | 32.5% | 21.5%/25.3% |
| $208,201 – $323,000 | 35% | 25.8% |
| $323,001 or more | 28% | 18.8%/23.8% |
Single or Head of Household – 2014
| AMTI | Income | QD & LTCG |
|---|---|---|
| $0 – $52,800 | 0% | 0%/15% |
| $52,801 – $117,300 | 26% | 15% |
| $117,301 – $211,700 | 32.5% | 21.5%/25.3% |
| $211,701 – $328,500 | 35% | 25.8% |
| $328,501 or more | 28% | 18.8%/23.8% |
Married Filing Jointly – 2013
| AMTI | Income | QD & LTCG |
|---|---|---|
| $0 – $80,800 | 0% | 0%/15% |
| $80,801 – $153,900 | 26% | 15% |
| $153,901 – $239,020 | 32.5% | 21.5%/25.3% |
| $239,021 – $477,100 | 35% | 25.8%/30.8% |
| $477,101 or more | 28% | 23.8% |
Married Filing Jointly – 2014
| AMTI | Income | QD & LTCG |
|---|---|---|
| $0 – $82,100 | 0% | 0%/15% |
| $82,101 – $156,500 | 26% | 15% |
| $156,501 – $242,980 | 32.5% | 21.5%/25.3% |
| $242,981 – $484,900 | 35% | 25.8%/30.8% |
| $484,901 or more | 28% | 23.8% |
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Steve says
I’ve guessed I’ve not looked at this in detail and find it a bit confusing. We typically pay AMT. When I saw the phaseouts and such for regular tax calculations, I wasn’t too concerned because I assumed that the AMT would set the bar anyway. (I guess there is a chance we can exceed the AMT amount . . . ). But are you implying that there are AMT phaseouts as well that are essentially having a similar effect of raising the bar?
Harry says
Great question. I added a bit of explanation to the article for everyone.
Brian says
Thanks so much for this!
Your explanations of the AMT are the most clear I’ve read. It drove me crazy that the AMT seemed to be taking far more than the 26/28% advertised. You make it clear what AMT is actually doing. I still don’t like it, but at least I can understand it.
An additional “Thank You TFB” for the Back Door IRA articles (with great graphics), very helpful.
Ivy says
That was quite helpful, thank you, I’ve never looked into how AMT works. A stupid question probably, but what happens in the top category – e.g. for married filing jointly at the $485,000 mark? Do they go back to the regular deductions?
Harry Sit says
At the $485k mark, you lose all the exemption under AMT, but your rate is lower (28% vs 39.6% under regular tax). The race between AMT and regular tax keeps going. At some point, the regular tax will catch up, and you will no longer pay AMT.
Art says
Harry,
Great article as usual! I can track all except the different rates for QD and LTCG in joint married phase-out range. Could you briefly explain? Thanks, Art
Harry Sit says
QD and LTCG are included in the phaseout calculation. For every extra $4 in QD or LTCG, you lose $1 in AMT exemption, which bumps $1 more into the 26% or 28% zone, which makes you pay $0.26 or $0.28 more in tax. That comes out to 6.5% or 7% on that $4. If the tax rate on QD and LTCG is normally 15%, now you are paying 21.5%. If your AGI makes you qualify for the extra 3.8% Medicare surcharge, now you are paying 25.3%. In the next range, you have 15% + 7% + 3.8% = 25.8% or 20% + 7% + 3.8% = 30.8%.
not2late says
Here’s a site with great information on AMT:
http://fairmark.com/amt/index.htm
But even with that, I remain baffled on some situations relevant to me, such as ISO and ESPP. I have to say “uncle” and consult a CPA for tax planning.
Big George says
Thanks or the informative post. I suspected I was in a funky, not obvious by inspection, bad incremental tax situation due to the AMT calculation. So I built a spreadsheet to analyze a stock sale I was considering. I calculated a 44% incremental tax rate. I didn’t believe it so I had a CPA estimate it. They estimated 43%. I believe it is a combination of the AMT phase out, the ACA tax, and the phaseouts of personal and dependent exemptions and charitable deductions. What a horrendous mess our tax code is.
My solution is to make a large donation to a Donor Advised Fund, which gets me to a lower incremental bracket while allowing me to take advantage of a higher deduction for donations I would make anyway in the future when I’m retired and in a lower tax bracket.
DIYtaxgirl says
How do you calculate the upper bound of the 32.5% effective rate?