can someone explain me AMT in dummy terms?

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Peppergrass
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can someone explain me AMT in dummy terms?

Post by Peppergrass »

Hi Guys,

I'm stumped with AMT, and how it affects me.. as yes, wait for it....... I sell options. Which means I generate a lot of margin fees, and exposure fees.. right now I'm at about 36k in margin fees, but as I understand it, with AMT at work you cannot claim investment expenses?

the second thing reading on AMT, is that everyone says it affects the range of people who pull in 200-500k.. what I don't understand here is why it doesn't "affect" people who make more then 500k ???

any and all info on this in dummy terms would be helpful, as it's making me second guess selling options or my strategies if I cannot claim that investment interest later on, as that takes a bigger bite of risk vs. reward scenarios.
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Alexa9
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Re: can someone explain me AMT in dummy terms?

Post by Alexa9 »

Buy and hold index funds goooood
Options baaaaaad
mervinj7
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Re: can someone explain me AMT in dummy terms?

Post by mervinj7 »

Peppergrass wrote: Thu May 03, 2018 6:00 pm right now I'm at about 36k in margin fees, but as I understand it, with AMT at work you cannot claim investment expenses?
$36k in margin fees... my mind is blown.
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whodidntante
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Re: can someone explain me AMT in dummy terms?

Post by whodidntante »

AMT is designed to keep people from paying little to no income tax on a lot of income. It's a kind of floor for what you must pay. The TCJA excluded more people from paying AMT, but some people are just lucky I guess.

If you are not currently at IB, you're probably paying more interest than you need to.
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MP123
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Re: can someone explain me AMT in dummy terms?

Post by MP123 »

Peppergrass wrote: Thu May 03, 2018 6:00 pm
the second thing reading on AMT, is that everyone says it affects the range of people who pull in 200-500k.. what I don't understand here is why it doesn't "affect" people who make more then 500k ???
Because the maximum AMT rate is 28% and the regular tax rates run up to 39.6%

You have to pay the higher of your regular tax or your AMT tax.

So once your income gets high enough the regular tax amount gets higher than the AMT so you pay it instead. In other words it's even worse than the AMT.
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dratkinson
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Re: can someone explain me AMT in dummy terms?

Post by dratkinson »

Peppergrass wrote: Thu May 03, 2018 6:00 pm ...
the second thing reading on AMT, is that everyone says it affects the range of people who pull in 200-500k.. what I don't understand here is why it doesn't "affect" people who make more then 500k ???
...
It doesn't affect them because folks in the highest tax brackets are already paying a higher marginal tax rate than that imposed by AMT. Verify this for yourself by checking the IRS tax rate schedules.
See: http://www.google.com/search?q=IRS+tax+ ... te:irs.gov
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random_walker_77
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Re: can someone explain me AMT in dummy terms?

Post by random_walker_77 »

AMT is an alternate tax calculation. Flat** rate at 28%, larger exemption*** (kind of like a big "standard deduction for AMT"), and you lose some things like deducting state taxes, and investment expenses greater than 2% of your income. The idea is to ensure that everyone pays a "minimum" tax. It started as a way to try and keep the rich from taking too many deductions and paying "too little" in taxes but inflation means that it affects a lot of people now.

The thing is, under the standard system, you might be in the 28% bracket, but that's just the marginal rate for the last x dollars. Some of your income is taxed at 0%, then 15%, 20% and so on as you fill the income brackets... and then in this example, the final dollars are taxed at 28%. An overall weighted average (or basically taxes / income) might yield something like 18% overall. Of course, if you earn an additional 10000 at 28%, then your overall rate gets averaged up to, let's say, 18.7%. (made up numbers, not mathematically accurate)

So you could be in the 35% bracket, paying a lot of state taxes etc, and after deductions have an average rate of 24%. But then recalculating under the AMT system where you add back disallowed deductions, subtract the hefty AMT exemption and multiply by 28% and find yourself owing more under the AMT calculation, in which case that's the number you pay. There are some things where the "extra" AMT tax paid can be credited back to you in future years when your AMT tax is lower than your regular tax calculation (https://en.wikipedia.org/wiki/Alternati ... ax#Credits)

If you're paying a lot of taxes at high marginal rates, your regular tax is going to be bigger than the AMT, and you'll wish you only had to pay the "AMT" tax rate...

** actually, it's 2 brackets at 26% and 28%, but they're close enough to conceptually think of it as a flat rate at first.
*** like a lot of deductions, the exemption also phases out as your income gets very large

The new tax changes mean that in 2018, you'll be less likely to hit AMT due to larger exemptions and higher phaseout incomes
http://www.savingtoinvest.com/alternati ... n-amounts/
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Peppergrass
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Re: can someone explain me AMT in dummy terms?

Post by Peppergrass »

I blew someone's mind, hahaha. well won't tell you what it should be in the future then

yeah, at IB, problem is I get no free treasury purchases , some free ETF like others at fidelity and vanguard and TD... but I'm a gambler, what can I say.


OHHHHH, ok, that makes sense.. that's for explaining that. so AMT caps at 28%, ok I see the whole picture now.. how simple! no wonder why I was able to deduct my expense interest last year, LOL, because they get more from me then going AMT...

thank you random, drat, MP... for clarification.. good group here I have to say again!!! thanks for taking the time to explain that, as no article once I read mentioned what AMT calculates out to... not one! good link random, am reading it right now
Ragnoth
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Re: can someone explain me AMT in dummy terms?

Post by Ragnoth »

Note, I would be careful with the new tax reform in general. Many of the miscellaneous deductions (the ones where you could claim them if it was >2% of AGI) have been disallowed entirely.

My recollection is margin interest should still be fully deductible (rule of thumb is things that were fully deductible remain that way), but deductions have vanished left and right without much publicity or fanfare (e.g., interest for home equity credit lines, or various deductions for money-making “hobbies” that fall short of a full on business). Fewer deductions in general is another reason why you won’t see as many people bumping up against the AMT next year.
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9-5 Suited
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Re: can someone explain me AMT in dummy terms?

Post by 9-5 Suited »

The government wants to make sure you don't keep too much of your hard earned money, so they effectively set a floor on your taxes (the AMT method). With the standard method you can accrue massive amounts of deductions (or at least you could in the past!) that allowed people with strong incomes to pay minimal federal income tax.
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Peppergrass
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Re: can someone explain me AMT in dummy terms?

Post by Peppergrass »

"Fewer deductions in general is another reason why you won’t see as many people bumping up against the AMT next year."

thanks for that piece of info, I was wondering when reading around why it said fewer people next year will be hit with AMT... makes sense now
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MP123
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Re: can someone explain me AMT in dummy terms?

Post by MP123 »

Peppergrass wrote: Tue May 15, 2018 1:22 pm "Fewer deductions in general is another reason why you won’t see as many people bumping up against the AMT next year."

thanks for that piece of info, I was wondering when reading around why it said fewer people next year will be hit with AMT... makes sense now
I think the main reason why fewer people will have to pay AMT in 2018 is the much higher AMT Exemption and much much higher AMT Phaseout range for that exemption.

For 2017 the AMT Exemption was $84,500 but that started to phaseout at only $160k AGI and caught many taxpayers in the $200-500k AGI range.

For 2018 the exemption is $109,400 and it doesn't phaseout until over $1M AGI.

So most people with an AGI less than $1,000,000 will have enough AMT exemption that they won't owe any AMT tax. Of course there's still the issue of regular tax rates being higher than AMT in the high brackets but the new maximum 37% bracket is better than 39.8%.
The Wizard
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Re: can someone explain me AMT in dummy terms?

Post by The Wizard »

Peppergrass wrote: Tue May 08, 2018 12:52 am I blew someone's mind, hahaha. well won't tell you what it should be in the future then

yeah, at IB, problem is I get no free treasury purchases...
What is IB?
Attempted new signature...
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David Jay
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Re: can someone explain me AMT in dummy terms?

Post by David Jay »

The Wizard wrote: Tue May 15, 2018 4:26 pm
Peppergrass wrote: Tue May 08, 2018 12:52 am I blew someone's mind, hahaha. well won't tell you what it should be in the future then

yeah, at IB, problem is I get no free treasury purchases...
What is IB?
Interactive Brokers
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Topic Author
Peppergrass
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Re: can someone explain me AMT in dummy terms?

Post by Peppergrass »

MP123 wrote: Tue May 15, 2018 1:48 pm
Peppergrass wrote: Tue May 15, 2018 1:22 pm "Fewer deductions in general is another reason why you won’t see as many people bumping up against the AMT next year."

thanks for that piece of info, I was wondering when reading around why it said fewer people next year will be hit with AMT... makes sense now
I think the main reason why fewer people will have to pay AMT in 2018 is the much higher AMT Exemption and much much higher AMT Phaseout range for that exemption.

For 2017 the AMT Exemption was $84,500 but that started to phaseout at only $160k AGI and caught many taxpayers in the $200-500k AGI range.

For 2018 the exemption is $109,400 and it doesn't phaseout until over $1M AGI.

So most people with an AGI less than $1,000,000 will have enough AMT exemption that they won't owe any AMT tax. Of course there's still the issue of regular tax rates being higher than AMT in the high brackets but the new maximum 37% bracket is better than 39.8%.
MP, can you tell me in dummy terms what you are talking about with this exemption.. totally don't understand what you mean?
wrongfunds
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Re: can someone explain me AMT in dummy terms?

Post by wrongfunds »

In dummy terms, unless your income is over $1M, just do not worry about having to pay AMT. He was explaining the "why" of it but do you really care about "why"?
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