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What Income is my AMT sweet spot?

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  • What Income is my AMT sweet spot?

    Dual physicians, both W2 workers.  After Trad 401k/HSA/Dependent Care, our income varies from 490k-600k depending on how much call I take.   When I played around with Turbotax I noticed there were different tax rates where extra money made was tax at a lower rate and then back to a higher rate.  For example income from 500k->510k was different than 600->610k.  Im assuming this is related to AMT.  Only major tax deduction is 1 child, mortgage interest 18k, state income tax 10%.

    For you tax masters, at what income will we be taxed at a higher rate?  In other words, from a tax point of view what range of income should we target?

    link to forbes article: http://www.forbes.com/sites/feeonlyplanner/2011/12/16/the-alternative-minimum-tax-sweet-spot/#37f336cb76d9

    Thanks in advance.

  • #2
    That's an interesting article, but calculating your "sweet spot" will probably require tax software and $ amounts. For example, your state marginal tax rate is 9.9% but that's not your effective rate. I'm not a TT user, so I can't comment on what information it can provide you, but maybe it has the capabilities. If you are truly willing and able to adjust your income and deductions to the point that it makes a significant difference in your taxes due, then you probably should consider hiring a CPA.

    otoh, there are some math gurus here who might enjoy (and have time for) the challenge! :-) Good luck!
    Our passion is protecting clients and others from predatory advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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    • #3
      Are you sure this is AMT effect, I would assume you are above the AMT with that stated combined income.

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      • #4
        Forgive the ignorance of my last post.  I remember reading this Kitces post a while back which may answer your question.

        https://www.kitces.com/blog/evaluating-exposure-to-the-alternative-minimum-tax-and-strategies-to-reduce-the-amt-bite/

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        • #5


          Forgive the ignorance of my last post.  I remember reading this Kitces post a while back which may answer your question. https://www.kitces.com/blog/evaluating-exposure-to-the-alternative-minimum-tax-and-strategies-to-reduce-the-amt-bite/
          Click to expand...


          Thanks for finding that article - excellent reference.
          Our passion is protecting clients and others from predatory advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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          • #6
            Johanna, the AMT sweet spot could affect my tax planning this year.  Do you know if the Kitces article numbers from that 2014 article are still roughly accurate, or has inflation indexing or other tax law changes affected them?  I found another article that listed the sweet spot at about 450k-600k depending on one's individual circumstances.

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            • #7
              Johanna, Im W2 so I have very few deductions all of which I take the max allowable.  I just want to know what my effective tax rate is when I take an extra call.  I find it interesting that at some point it becomes less worth it but that point is buried in the tax code.

              Gipper, for me I believe AMT comes into effect earlier due to high state income tax (which is tax deductible under the normal fed income tax system but not AMT).  According to your article (thanks) I want to avoid "the bump" on the low end but on the high end eventually I will come out of the AMT and hit the 39.6% tax rate (but be able to deduct my state income tax.....).  Like you said the "sweet spot" is maybe somewhere between 450k-600k.  I wish there was a easy way to figure this out......

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              • #8
                Given that state taxes and individual deductions will make everyone a little different, I think tax software is your best bet.

                If I'm thinking of this correctly, it is probably more important to stay out of the low income end of the "bump zone" than to avoid going slightly over the "end of AMT" point. Johanna may correct me but I think the latter is just the break point where the regular tax system becomes higher rather than a "cliff".

                OP, do you have other options to adjust income, such as ramping up/down cash balance/DB plan, pre-paying state tax or property tax before the new year, or perhaps even doing some or delaying doing Roth 401k contributions or Roth conversions. (I like this last idea least because I hope to convert at far less than the 28% AMT rate in retirement)

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                • #9
                  Ok I played around with turbotax and here are the results for my situation:

                  36k in a Trad 401k (max allowed as W2)

                  $1500 in Dividends

                  17,800 in Mortgage Interest

                  7,800 in Property Tax

                  1 child

                   

                  Income -> Fed+Medicare taxed at X%

                  490-508k -> 35%

                  510k -> 33%

                  511-610k -> 28%

                  612k -> 37.5%

                  >615k -> 41%

                   

                  Our income was 503k so we stopped right before the "acceleration" phase which was basically 510-610k for my situation.  Interesting......

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                  • #10
                    Its funny, I have very little capacity to shift or defer income from year to year.  In my mind, putting away the max I can afford into my Defined Benefit Cash Balance plan trumps the marginal benefit of squeezing out a little more in the 28% AMT sweet spot, since I hope to convert most of deferred retirement funds to Roth in an effective tax rate below 20% (hopefully closer to 10-15%) during early retirement.  I think I'll just forget about this stuff for now.  I can see how small business owners or others with the capacity to shift income from year to year would be more interested in this.

                    Interesting tidbit I just applied from another WCI thread on multiple 401ks.  One of my small moonlighting gigs will only pay me as a W2 so I wasn't psyched about continuing doing it and getting taxed at top marginal rate.  However, I recently learned that my primary 401k/PSP is set up as a 3:1 match, so I'm only using $13250 of my personal $18k cap.  Thus, I can apply $4750/yr towards a second 401k (and get their match) at the other hospital.  Grateful to this website for that one!

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                    • #11
                      Gipper, being full income W2 we are obviously in a different situation than you.  We have no ability to shift or defer income from year to year.  We already contribute the max to our retirement plan (18k+18k).  Where this info is important to me (or someone else) is two ways:

                      1.  If I had taken a more calls I would have been taxed at 28% (on those calls) not 35% like I was on my last call of 2015.

                      2.  If we chose to contribute to a Roth 401k instead of Trad 401k I would have been taxed at 28% instead of 35% like I thought.  This one is very interesting since people in my group/situation might be basing their decision on the wrong numbers.

                       

                      Now my issue is how do I recreate this info for the year 2016?

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                      • #12
                        Just found this IRS interactive tool to calculate your potential AMT. Be sure to answer "No" to the first question. It is for 2015 but the numbers change so little from year to year that you can use it for 2016, too.

                        Here is a comparison of 2014 - 2015.
                        Our passion is protecting clients and others from predatory advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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                        • #13
                          Personally, I think the income sweet spot comes in between $120K and $250K. You're still in a relatively low federal bracket but have maxed out your SS taxes. You have enough income to max out an individual 401(k) or similar plan but not so much that you have to pay Obamacare taxes.

                          That said, if it's the same amount of work, I'd just as soon make $500K or $750K or $1M and pay the extra taxes!
                          Helping those who wear the white coat get a fair shake on Wall Street since 2011

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                          • #14
                            I'll admit I'm a novice with taxes compared to others on this board and I haven't been in the 125k-250k zone for a while, but wouldn't that put one squarely in the low end of the AMT bump zone, and negate much of one's deductions.

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                            • #15
                              I ran some calculations on my sweet spot range and it was only from $555,200 to $569,500. The tax savings for $14,000 hardly seem the effort required to try and plan income for the next year, and since it is so small I could very well miss it anyway.

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