When does AMT exceed regular income tax?

July 28, 1999

Subject:  AMT question
From:  Andre' Scharkowski
Date:  Wed, 23 Jun 1999

Dear Michael,

I have been looking at AMT versus regular federal income tax and it seems to me that for joined incomes of $270K and more the AMT total may actually be lower than the regular income tax total.

Which one comes out higher depends mainly on the deductions.

Say, you have a total gross joined income of $400,000 in one year due to the cash-in of some company stock options.

If you don't consider deductions at all, that comes out to about 33.0% for regular income tax:

(for up to $278,450 tax totals to
$83,870+(($400,000-$278,450)*0.396)=$132,000)
and to a fixed 28% for AMT.

You would need quite a large amount of deductions to offset this ratio.

Am I forgetting something?

Thanks for your opinion.

André Scharkowski

Answer

Date:  Wed, 28 Jul 1999

Hello André,

Sorry it took so long for me to write back to you.

First, I can't tell from your question whether there is a preference from exercising incentive stock options. This is an item of income for the AMT that isn't taxable for the regular tax, so it can result in the AMT exceeding the regular tax.

When your taxable income includes a large long-term capital gain, the tax rate that applies for regular tax and AMT is the same – 20%. Combine this situation with deductions that are disallowed for AMT, such as state income taxes, real estate property taxes or miscellaneous deductions (such as for employee business expenses or investment legal fees) and the AMT will probably exceed the regular tax.

There are some circumstances where the disallowance of deductions mentioned above will result in the tentative AMT exceeding the regular tax.

So, you see, this exercise is not simply a comparison of tax rates.

Good luck!
Mike Gray

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