Alternative Minimum Tax from Capital Gains

The alternative minimum tax, or AMT for short, is a special tax rate that applies to those with high income. For those who trigger AMT because of one-time events such as capital gains from a stock sale, this may put you in a scenario you have had no experience managing before, and that is where a tax-focused financial advisor can be beneficial since hundreds of thousands of dollars in tax may be on the line.
The Alternative minimum tax calculation is very complex, and we can’t get into all the details here.
But here’s a few things to know:
AMT does not technically cause your capital gains to be taxed at a higher rate, but the realized capital gains will cause more of your income to be taxed at higher rates, so they do have an effect.
You can reduce the tax liability by AMT many different ways:
One is recognizing losses from any other investments to help offset gains. This is called tax loss harvesting, and will be incredibly important for you if you are subject to AMT.
This is also a great time to consider charitable donations, such as a donor advised fund, which can help you get a large upfront tax deduction today but then distribute money out to charities over many years.
Then, also know that being subject to the AMT will make you ineligible for several common tax deductions, for example deducting state and local taxes, and property taxes. So, if you don’t expect to trigger AMT in other years, you may be able to try and get those expenses onto a tax year where you will be able to claim a deduction and receive at least some benefit.
Ultimately, triggering Alternative minimum tax can result in a marginal tax rate 7 to 11% higher than you may be used to otherwise. This increase in tax rates make tax planning much more important and beneficial to you. Trigger AMT tax once is also usually a sign of many complicated tax decision in the future as well.
At Arnold and Mote, we are a fiduciary, flat fee financial advisor who help clients in situations just like this. If you’d like to talk about how we can help you, please reach out and schedule a free introductory meeting.
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