Dear Tax Talk,
In replying to a question titled: “Capital gains on a duplex,” you wrote: “The remaining $62,500 in gain is taxed at a maximum of 15 percent, or $9,375 in tax.” This advice is seriously incomplete for any taxpayer subject to the alternative minimum tax. The capital gains would be taxed at 22 percent, based on the AMT. Commentators consistently ignore the impact of the AMT and consequently give inaccurate tax advice and perpetuate the myth that the Bush capital gains tax cut had something in it for the little guy.
It is widely understood that the maximum long-term capital gains tax rate is 15 percent. The same rate is used for alternative minimum tax. As far as I know, there is no 22-percent AMT long-term capital gains rate (see lines 49 & 50 of Form 6251).
Although these are the maximum rates applied to gains, your marginal rates may be higher due to the function of other tax provisions that eliminate (phase out) tax deductions or credits.
For example, a married couple who has tax-exempt interest income and Social Security benefits may end up paying income taxes because the tax-exempt interest causes the Social Security benefits to be taxable. Hence, the interest is not really tax-exempt.
A single parent with two children who makes $22,000 is in the 10-percent tax bracket and is entitled to refundable tax credits of about $3,300. If he or she makes $10,000 more, his or her refund is reduced by $2,100, or a 21-percent tax rate even though the marginal rate is 10 percent.
The list of phaseouts that in effect raise your actual tax rates is exhaustive and does not apply to every taxpayer. For example, phaseouts exist for practically all adjustments to gross income on line 23 to 35 of Form 1040, the $25,000 deduction for rental losses, taxation of Social Security benefits, allowance and bases of itemized deductions and personal exemptions, various credits such as child care, child tax credit, education credits and so forth.
The disallowance of these items goes a long way to distort the actual maximum long-term capital gains tax rate of 15 percent. Hence, we don’t consistently ignore the impact of hidden taxes, it’s just impossible to tell what the actual tax will be without knowing every detail of the taxpayer.
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.