Post-JGTRRA AMT Planning

Clients will certainly expect to reap the benefits of the lower rate on dividends and capital gains established by the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA). But they will have to plan carefully to avoid unpleasant surprises.

Example 1: F and W, married filing jointly, have wages of $150,000 and dividends of $30,000 in 2003. Their children are grown. They sell some low-basis stock in 2003, which results in a gain of $100,000 that they anticipated would have been eligible for the new 15% rate. However, the results are devastating. If they take a standard deduction, their 2003 tax without the capital gain will be $32,313. If they sell the stock and recognize a $100,000 net long-term capital gain, the tax will be $63,860, which includes $15,557 of alternative minimum tax (AMT). The marginal tax rate on the stock sale is actually over 31%.

The lower rates on dividend and long-term capital gain income apply for both regular tax and AMT purposes. Two main culprits trigger the AMT. First, Congress lowered the regular tax rates, but not the AMT rates. Second, the JGTRRA increased the AMT exemption to $58,000 for married taxpayers filing jointly, and to $40,250 for single taxpayers, but the phase out ranges remain unchanged. The exemption begins to phase out at $150,000 of alternative minimum taxable income (AMTI) for married taxpayers filing jointly, and is completely phased out at AMTI of $382,000. The phaseout for single taxpayers begins at $112,500 AMTI and ends at $273,500 AMTI.

Example 2: B and E are in a similar tax situation as F and W, but their income from wages is $50,000; from dividends it is $10,000. They also sell low-basis stock, which results in a recognized $100,000 net long-term capital gain. Their 2003 tax, without the gain would have been $2,964. With the gain, however, it is $16,724. The marginal rate on the capital gain is almost 13.8%. The AMT exemption protects F and W, but not B and E.

The AMT is most likely to affect taxpayers with AMTI above the phaseout threshold and a significant portion of their income from dividends and/or long-term capital gain.

Example 3: The facts are the same as in Example 1, except that F and Ws wages are $200,000, their dividends are $30,000 and their long-term capital gain is $50,000. Their tax without the capital gain would have been $47,160; with the capital gain it is $57,370, including $1,905 of AMT. The marginal rate on the capital gain drops to almost 20%. Thus, the tax on their ordinary income is high enough to trigger only a small amount of AMT.

 

Planning

One technique to mitigate the AMT is to maximize use of the AMT exemption. Shifting income between years can result in an overall lower tax liability, as can changing the mix of income. Opportunities may allow taxpayers to manage the mix of income taxed at ordinary and capital gain rates. Needless to say, tax planning under the JGTRRA is not for the faint of heart.

From John W. Lindbloom, CPA, PFS, Huber, Ring, Helm & Co., P.C., St. Louis, MO