You don’t get to decide whether you have to file taxes under the standard federal income tax system or whether you are subject to the alternative minimum tax and capital gains rates. Claiming investment losses may help you avoid AMT exposure. Calculate your regular tax rates and then calculate the AMT rate and pay the greater amount. If you do have to pay the AMT, you’re not alone. Approximately 4.8 million U.S. taxpayers will owe as much as $35 billion in alternative minimum tax in 2017.
If you are prepared to deduct investment losses on your tax return, you may be able to avoid the IRS alternative minimum tax. This, of course, depends on the scope of your investment losses.
Claiming the Alternative Minimum Tax
Created in the 1960s, the AMT was designed to ensure that high-income taxpayers would pay at least some tax. Unfortunately, there was no provision to index the AMT for inflation, so over the ensuing decades many middle-class taxpayers have ended up subject to the AMT. Generally, anyone who must pay the AMT capital gains rates will pay higher taxes. Fill out and submit Form 6251 Alternative Minimum Tax – Individuals to determine and pay your AMT tax. For tax year 2017, the AMT exemption amount is just $54,300 for individuals and $84,500 for married couples filing jointly. It starts phasing out at $120,700 for individuals and $160,900 for married couples filing jointly. Above those exemption amounts, the AMT tax is basically a flat rate.
Investment losses in taxable accounts, as opposed to non-taxable accounts such as IRAs, can help reduce the adjusted gross income (AGI) by offsetting capital gains. AMT capital loss carryover from previous years can also help you avoid the AMT. For example, if you had $15,000 in investment losses for 2016, you can claim $3,000 in losses for tax year 2016, which leaves you with a balance of $12,000 in losses. You can carry another $3,000 over for tax year 2017, leaving you with a carryover of $9,000 divided over the following three years. While many other deductions disappear under the AMT, investment losses are not one of them.
Certain situations can trigger the AMT for middle-income households. These include:
- Large property and state tax deductions – the AMT disallows such deductions.
- Having numerous dependents.
- Home equity loans used for any purpose other than home improvement; interest for any other purpose is not deductible under the AMT.
- Long-term capital gains may boost you over the AMT exemption limit.
- Stock options are taxed under the AMT on paper profits, even though there’s no actual profit until you sell.
There’s not much you can do about high state and local property taxes, other than move. You also can’t do much about the number of your dependents, but you can plan ahead. Try to avoid the AMT by planning carefully if you have a large capital gain or are dealing with exercising stock options. On the other hand, a one-time large capital gain, such as a house sale, may subject you to the AMT only for that year.
Filing for AMT in 2018
Even if you are subject to the AMT in tax year 2017, that may not prove the case in tax year 2018. The Tax Cuts and Jobs Act of December, 2017 changes the exemption amount for the AMT to $70,300 for individuals and $109,400 for married couples filing jointly. The 28 percent AMT rate will apply to excess AMT income of $95,750 for individuals and $191,500 for married couples filing jointly. AMT exemptions phase out at $500,000 for individuals and $1 million for married couples filing jointly.
A graduate of New York University, Jane Meggitt's work has appeared in dozens of publications, including Sapling, Zack's, Financial Advisor, nj.com, LegalZoom and The Nest.