Kiddie tax & AMT

[JCH]

Has anyone ever encountered these together? My client sold appreciated stock for all three of his minor kids held in an UTMA, and racked up a long term capital gain of over $55,000 for each. (why do they never call us before they do these things...)

According to my calculations this puts all three kids in AMT, because their AMT exemption is limited to $6,050. I was thinking that their tax would be limited to 15% LTCG rate, but after reviewing the Form 6251 and 8615 instructions it seems correct.

Has anyone run into this issue before? Thanks.

[Snaggletooth]

Agree with you

I agree that the ceiling on the capital gains should be 15%. The AMT exclusion is reduced as you say, but if this $55K is substantially all their income, the tax rate should not exceed 15%.

Capital gains does not by itself create AMT. However, significant capital gains that cause AGI to exceed the threshhold may cause the "rest of the income" to lose exemptions and low brackets.

For example, $55K in LTCG and $10K in other income means that the $10K is subjected to virtually no tax due to exclusions and super-low brackets, and the $55K is limited to the 15%. However, to the extent that the income exceeds the exclusion, AMT starts digging into the $10K and destroys the low rates and exclusions by applying the AMT %.

[JCH]

Thanks for your reply. The kicker is my software (Drake, which I will retire after this season) not only can't calculate the kiddie tax, but subjected ALL the income to AMT. I kept looking at the 6251 thinking this just has to be wrong. I did the entire 6251 and 8615 by hand and sure enough, the software was wrong.