$4,400 in AMT? sanity check, please?

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sky jumper
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Joined: Thu Sep 21, 2017 1:50 pm

$4,400 in AMT? sanity check, please?

Post by sky jumper » Mon Apr 16, 2018 9:48 am

can someone tell me what/if I'm missing something here?

Married filing jointly.
2 kids.
$11k mortgage interest.
$11k property tax.
$8k donations, charitable contributions.

AGI: $297k
Deductions: $42k
Exemptions:$16.2k
Regular Tax: $53.8k
AMT: $4.4k
Total Tax: $58.3k
Effective tax rate: 19.6%

Every year our AMT goes up. Every year our effective tax rate goes way up. But our income has only increased modestly, as in 3% per year. What gives?? it's almost as if TaxAct is an arm of the IRS and it's programmed to secretly increase your taxes every year without you knowing why.

PFInterest
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Re: $4,400 in AMT? sanity check, please?

Post by PFInterest » Mon Apr 16, 2018 9:56 am

sounds about right.
minus your paranoia.

Globalviewer58
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Re: $4,400 in AMT? sanity check, please?

Post by Globalviewer58 » Mon Apr 16, 2018 10:01 am

AGI $297K minus AMT exemption $84.5K = $212.5K x 26% = $55.25K
AGI $297K minus AMT exemption $84.5K = $212.5K x 28% = $59.5K
so your TaxAct result looks about right.

quantAndHold
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Re: $4,400 in AMT? sanity check, please?

Post by quantAndHold » Mon Apr 16, 2018 10:03 am

Sounds about right. That’s how a progressive tax system works. A high marginal rate will increase the effective rate. It’s “only” 3%, but 3% in your case is like $10k, which is taxed at your marginal rate.

sky jumper
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Re: $4,400 in AMT? sanity check, please?

Post by sky jumper » Mon Apr 16, 2018 10:17 am

ok. but what makes me question this is that my $11k in property tax does absolutely nothing for me. if I take it out my tax bill is exactly the same?? does the AMT calculation essentially negate any deduction for real estate taxes?? I don't recall that being the case in previous years.

Also, not this this really matters once the dust settles, but we both claim 1 withholding allowance and we owe $10k this year. with a nice $93 penalty. last year we owed $1k, same withholding. again I know withholding is arbitrary and does not equate to taxes paid, but it sticks out as a red flag.

Grt2bOutdoors
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Re: $4,400 in AMT? sanity check, please?

Post by Grt2bOutdoors » Mon Apr 16, 2018 10:27 am

sky jumper wrote:
Mon Apr 16, 2018 10:17 am
ok. but what makes me question this is that my $11k in property tax does absolutely nothing for me. if I take it out my tax bill is exactly the same?? does the AMT calculation essentially negate any deduction for real estate taxes?? I don't recall that being the case in previous years.

Also, not this this really matters once the dust settles, but we both claim 1 withholding allowance and we owe $10k this year. with a nice $93 penalty. last year we owed $1k, same withholding. again I know withholding is arbitrary and does not equate to taxes paid, but it sticks out as a red flag.
AMT excludes ability for you to deduct property taxes. That has always been the case when subject to AMT. Essentially, your deductions are limited to mortgage interest, charitable contributions and the proportion of your exemptions that have not been reduced by Pease.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

libralibra
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Re: $4,400 in AMT? sanity check, please?

Post by libralibra » Mon Apr 16, 2018 1:12 pm

The good news is that next year you won't have AMT and your regular tax drops to 48.9k (according to http://taxplancalculator.com with your numbers) - about 10k less overall!

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neurosphere
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Re: $4,400 in AMT? sanity check, please?

Post by neurosphere » Mon Apr 16, 2018 2:28 pm

sky jumper wrote:
Mon Apr 16, 2018 10:17 am
Also, not this this really matters once the dust settles, but we both claim 1 withholding allowance and we owe $10k this year. with a nice $93 penalty. last year we owed $1k, same withholding. again I know withholding is arbitrary and does not equate to taxes paid, but it sticks out as a red flag.
Sticks out as a red flag for what? I find by far the most common cause of under-withholding on W2 income is due to two-earners in a family (whether 2 jobs for one spouse, or 1+ jobs each) not filling out the W4 correctly. The other source of error is not accounting for dividend and capital gains income, and then not paying estimated taxes for some side work.

I suspect that either W4s were not filled out following the instructions on the two-earner worksheet, or that they were filled out when incomes were different. Changes in both total joint income, as well as the ratio between incomes will change tax due and also the accuracy of the W4 (that is, W4s may need to be updated as income rises and/or ratio of incomes change).
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes".

sky jumper
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Re: $4,400 in AMT? sanity check, please?

Post by sky jumper » Mon Apr 16, 2018 3:26 pm

neurosphere wrote:
Mon Apr 16, 2018 2:28 pm
I suspect that either W4s were not filled out following the instructions on the two-earner worksheet, or that they were filled out when incomes were different. Changes in both total joint income, as well as the ratio between incomes will change tax due and also the accuracy of the W4 (that is, W4s may need to be updated as income rises and/or ratio of incomes change).
two earner worksheet??.... oh. well yeah that might explain the $10k shortfall. not sure how I could be married 10 years and not know about that one... but it doesn't explain why we didn't get hit with it last year with the same withholding. it was the sharp YOY difference that stuck out to me as a red flag that something is amiss. it appears perhaps something was amiss in 2016.

Boglegrappler
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Re: $4,400 in AMT? sanity check, please?

Post by Boglegrappler » Mon Apr 16, 2018 5:01 pm

I'm not questioning the number per se, but based on your observations, I would suggest that you print out last years 1040, and schedule A and B, and then this years, and do a quick major line-by-line comparison. Having the paper side by side can help you figure what's going on.

I've found that using tax software (turbotax), I am prone to making errors in entry and also understanding how some values flow from one place to another. Given that you seem genuinely flummoxed by the upward shift in your taxes, it might shed light on your situation.

I started doing that religiously years back when I accidentally discovered after the fact that I had overpaid a rather large amount by double counting some Treasury interest because I didn't understand how turbo tax used the forms. Fortunately I found it before the time limit ran out to file amended returns, but not by much.

You likely have already done this, but its the only suggestion that I've got. Good luck.

nolesrule
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Re: $4,400 in AMT? sanity check, please?

Post by nolesrule » Mon Apr 16, 2018 6:35 pm

In 2017 for us Married 0 had incremental marginal withholding of 25%. Our incomes are close to even. Yet our marginal rate was 32.5% due to AMT and the exemption phaseout. We ended up having an additional ~$2500 withheld through W-4 changes.

The year before my wife's income was a little lower and the marginal withholding was in the 15% bracket, mine was barely into the 25% bracket, yet our actual marginal rate was 28%.

So a little bit of income increase with 2 incomes is likely to increase the shortfall of taxes withheld vs. actual liability. Income that's not close to even will make the gap even worse, and AMT will really enlarge the gap.

And you may want to pay attention even more with 2018. Even with the tax cuts, withholding for married couples will drop even more. At married 0 we had to double our additional withholding compared to 2017 because of the change in the withholding tables, even though we will no longer be in AMT and our marginal rate drops to 24%.

quantAndHold
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Re: $4,400 in AMT? sanity check, please?

Post by quantAndHold » Mon Apr 16, 2018 6:44 pm

Boglegrappler wrote:
Mon Apr 16, 2018 5:01 pm
I'm not questioning the number per se, but based on your observations, I would suggest that you print out last years 1040, and schedule A and B, and then this years, and do a quick major line-by-line comparison. Having the paper side by side can help you figure what's going on.

I've found that using tax software (turbotax), I am prone to making errors in entry and also understanding how some values flow from one place to another. Given that you seem genuinely flummoxed by the upward shift in your taxes, it might shed light on your situation.

I started doing that religiously years back when I accidentally discovered after the fact that I had overpaid a rather large amount by double counting some Treasury interest because I didn't understand how turbo tax used the forms. Fortunately I found it before the time limit ran out to file amended returns, but not by much.

You likely have already done this, but its the only suggestion that I've got. Good luck.
This is really, really good advice. TurboTax is very helpful for DIYers, but don’t skip the step of going through the forms line by line, and figuring out where every number came from. Yes, you have to understand the tax law to do this. But that’s a good thing, because you can better optimize your future taxes if you understand the law.

Like Boglegrappler, I started doing this about 20 years ago when I got nailed for about $6k in penalties and interest because of a data entry error.

Every single year when I do the review I either find a data entry error, or something I forgot to enter, or something I don’t understand that sends me off to learn more about the tax code.

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