Author Topic: Marginal tax rate under AMT  (Read 2670 times)

ThriftyTechie

  • 5 O'Clock Shadow
  • *
  • Posts: 24
  • Location: SF Bay Area
Marginal tax rate under AMT
« on: December 17, 2016, 07:16:53 PM »
How do I think about my real marginal tax rate with AMT? I'm at 33% federal, but due to high CA state tax (9.3% or 10.3% bracket), I will probably hit AMT. This question is interesting in that I often want to know if I make an extra $100, how much will I actually get after tax? Then I can know if it's worth the effort.

msilenus

  • Pencil Stache
  • ****
  • Posts: 517
Re: Marginal tax rate under AMT
« Reply #1 on: December 17, 2016, 07:28:47 PM »
$52-$54.

That's just a guess that I think a lot of California AMT returns probably land in.  Real answer is to play around in tax software and see what pops out.  Phaseouts matter.

It's going to be higher than it looks (28% AMT rate + 10% CA + 1% NIIT + 1% Medicare = 40%) mostly because of the AMT exclusion phaseout.  Every four dollars of income kills a dollar of the phaseout, which is worth your AMT rate.  .28/4 = +7%.

MDM

  • Walrus Stache
  • *******
  • Posts: 9599
Re: Marginal tax rate under AMT
« Reply #2 on: December 18, 2016, 10:03:48 AM »
How do I think about my real marginal tax rate with AMT? I'm at 33% federal, but due to high CA state tax (9.3% or 10.3% bracket), I will probably hit AMT. This question is interesting in that I often want to know if I make an extra $100, how much will I actually get after tax? Then I can know if it's worth the effort.
See the case study spreadsheet, and change the data table column input cell for the table in P61:R562 from B13 to B2.

You would have to enter the CA state tax formula in G31 to be accurate across all incomes, but using only the state marginal rate at your income of interest in H31 will be close.

ThriftyTechie

  • 5 O'Clock Shadow
  • *
  • Posts: 24
  • Location: SF Bay Area
Re: Marginal tax rate under AMT
« Reply #3 on: December 20, 2016, 10:30:28 PM »
Thanks, this really is bizarrely complicated.
I found this explanation helpful. https://www.kitces.com/blog/evaluating-exposure-to-the-alternative-minimum-tax-and-strategies-to-reduce-the-amt-bite/
The effective federal tax rate goes up to 35% when income is in the AMT phaseout range. If I make more than tat, then the effective rate act goes down to 28% for a bit before going back up to 39%.
I am most likely going to be in the phaseout range, so very high effective tax rate.

SeattleCPA

  • Handlebar Stache
  • *****
  • Posts: 1437
  • Age: 59
  • Location: Redmond, WA
    • Evergreen Small Business
Re: Marginal tax rate under AMT
« Reply #4 on: December 21, 2016, 11:59:44 AM »
I don't think you should worry about the AMT. It'll probably be a couple of bucks. Or less.

PS. AMT hits you when you've got a good six figure income. And it often surprises you because you kind of forgot about it and then, wham, at tax time, you find you owe an extra chunk of tax you hadn't planned on. E.g., you made $300K and find you owe $2K of AMT. Or you made $600K and find you owe $8Kof AMT. But really those AMT amounts re-described as percentages of your income aren't that high.

ThriftyTechie

  • 5 O'Clock Shadow
  • *
  • Posts: 24
  • Location: SF Bay Area
Re: Marginal tax rate under AMT
« Reply #5 on: January 08, 2017, 02:45:08 PM »
I don't think you should worry about the AMT. It'll probably be a couple of bucks. Or less.

PS. AMT hits you when you've got a good six figure income. And it often surprises you because you kind of forgot about it and then, wham, at tax time, you find you owe an extra chunk of tax you hadn't planned on. E.g., you made $300K and find you owe $2K of AMT. Or you made $600K and find you owe $8Kof AMT. But really those AMT amounts re-described as percentages of your income aren't that high.

You are lucky that WA state has no state income tax. My taxes are six figures and it is important for me to understand what my marginal tax rate is at any time.
I put some numbers into TurboTax and mslenus is correct, my state + federal marginal rate is close to 50%. If I can increase my income a bit more to past the phaseout at $335k then my marginal tax rate will go down 7%.

MDM

  • Walrus Stache
  • *******
  • Posts: 9599
Re: Marginal tax rate under AMT
« Reply #6 on: January 08, 2017, 03:58:47 PM »
You are lucky that WA state has no state income tax. My taxes are six figures and it is important for me to understand what my marginal tax rate is at any time.
I put some numbers into TurboTax and mslenus is correct, my state + federal marginal rate is close to 50%. If I can increase my income a bit more to past the phaseout at $335k then my marginal tax rate will go down 7%.
For a single person age 30 with a 30 year $300K mortgage at 4%, $24K qualified dividends plus long term capital gains, and a flat 10.3% state tax, marginal rates have many ups and downs:


This includes most of the common credits, phaseouts, and AMT for federal, state, SS, and Medicare.  Adding self-employment tax (if applicable), actual state tax structure, etc., could make it even more complex.