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FAIR OR NOT, AMT APPLIES
July 15, 2008
So the AMT can make your effective rate on capital gains higher than 15%? Tough, says the Tax Court:
Petitioners' first objection to the application of the AMT is that it contravenes a 2001 statutory enactment of a 15-percent tax rate on capital gains. Petitioners assert that the application of the AMT makes the effective rate on their capital gain income slightly more than 15 percent. In their own words, petitioners contend that the "application of AMT [is] * * * rendered null and void" because of this contravention.
If only it were that easy.
In computing the AMT there is a special computational provision for taxpayers with net capital gains. Generally speaking, the net capital gain income is multiplied by 15 percent and the result is added to the tax on other income which is computed in the manner described above. Sec. 55(b)(3). Following this computational provision, petitioners' AMT is computed at $7,007, which petitioners contend causes their net capital gain income to be taxed at an effective rate slightly greater than 15 percent because of the disallowance of the entire amount of the standard deduction and exemptions.Petitioners' position would require a change to the statute that would apportion the disallowed items. Ultimately, however, respondent's computation is in accord with the statutes, and petitioners' argument fails.
The moral? The tax law is enforced based on what Congress actually did -- not on what you think they were trying to do.
Cite: Fritz, T.C. Summ. Op. 2008-81.
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Comments
Joe-
Who said tax law had to be fair?
Even under the “regular” income tax the effective tax on capital gains is not limited to 15%.
Since net capital gain increases Adjusted Gross Income, and therefore affects a ton of deductions and credits that are reduced or phased out based on AGI and potentially increases the taxable portion of Social Security and Railroad Retirement benefits, the true tax cost of capital gains can be substantially more than the stated maximum 15%.
The only way to truly limit the tax on capital gains to the stated rate is to remove such gains from the calculation of AGI.
TWTP
Posted by: Robert D Flach | July 15, 2008 10:31 AM
Good points, Robert- by Fritz taxpayer logic, the whole tax law is invalid because it is full of phase-outs that raise the marginal rate above the stated rate.
I'd still be happy to get rid of the phase-outs.
Posted by: Joe Kristan | July 15, 2008 10:53 AM