John M. Hoffman & Associates CPAs

Frequently Asked Questions

Capital Gains and Losses

But what about that 'Alternative Minimum Tax' (AMT) and capital gains?

Another not so simple question. Capital gains do effect the AMT. One way that capital gains effect the AMT is the phase-out of the AMT personal exemption. If you are in that "zone" of income, each additional $1.00 of income takes 25¢ away from your personal exemption. This effectively makes more of your income taxable.

The maximum capital gains tax rate of 15% still applies even in the AMT but if you add $1,000 of capital gain income to a taxpayer in that exemption phase-out "zone" in the AMT, the incremental tax on that capital gain is not $150, but $187.50. That is because the $1,000 of additional income takes away $250 of exemption, creating $1,250 more taxable income. At a 15% tax rate, that equals $187.50.

As we have mentioned throughout, additions to income have all kinds of adverse tax effects, so don't be sold on 15% as being the highest rate of tax on capital gains. There is also the effect of phasing out medical deductions, personal exemptions, child credits, education credits and so forth.