2008 ZERO Percent Cap Gains, for AMT?

[OtisMozzetti]

The Tax Book has reminded us all that during 2008, and during 2009-2010, the federal capital gains rate on those gains which fall into the lower two 10% and 15% rate brackets will be reduced from 5% to ZERO PERCENT.

On the back of Form 6251, Alternative Minimum Tax, it is seen that the reduced 5% capital gains rate applies likewise to the alt. min. tax. Will the ZERO PERCENT capital gains rate apply to AMT during 2008-2010, or will it be 5%?

[Golden Rocket]

Zero, if they

don't mess with it. I believe the zero percent bracket is an unintended aberration, and it would not surprise me if they legislate this thing into oblivion -- they may even wait until December of 2008, make it retroactive, and thus keep everyone on pins and needles again like they have the last couple years.

My understanding is that the low capital gains rates are not compromised in the AMT. They made this mistake once (by negated preferential LTCG rates for AMT) and suddenly, all commercial real estate froze. The mistake didn't even last two years. (Mid '80s). Thus, the answer to your question would be zero. I haven't seen a 2008 interpretation of this from an authoritative source yet, however, so I wouldn't bank on this.

The capital gain rates are not what causes problems for AMT. The capital gains are not taxed at higher rates, but the gain INCOME shoves the rest of the taxpayer's income upward such that his ordinary income is subject to the AMT. Imagine a return with $50K in wages who itemizes deductions such as property taxes and state income taxes. Imagine this same taxpayer also has $200K in capital gains subject to a 15% ceiling.

For AMT, the 15% ceiling still applies to the $200K, but now the problem is the other $50K. AMT proceeds to treat this return as $250K in income, thus the adjustments applicable to this income level rear their ugly head. So the damage is done to the upper $50K in income on a $250K return, even though the tax on $200 LTCG is frozen at 15%.

[OtisMozzetti]

How Capital Gains Affect AMT

Thanks, Golden Rocket, for your estimation that the zero percent rate will also apply to AMT, unless Congress changes it. My guess is that Congress wouldn't dare to make any change in the zero percent rate for regular tax capital gains retroactive. However, they could easily do away with the zero percent rate for 2009 and for 2010.

Your example, Golden Rocket, seems to consider a single filing status, and the AMT exemption amount is somewhat phased out by the AMTI getting up to $250,000, which means that .25 x $100,000 = $25,000 of AMT exemption has gone away. In other words, capital gains do trigger the AMT, not by negating the lower rates on capital gains, but instead by causing the AMT exemption to get phased out.

It should also be noted that enjoyment of the lower rate capital gains rate (the 5%/0%, not the 15%) is limited to the same amount of gain even if the AMTI minus the AMT exemption comes out less than the regular tax ordinary taxable income. In other words, not a penny more capital gain will be considered to fall "into the lower brackets" than is so for the regular tax. On the other hand, a LESSER AMOUNT of capital gain might fall "into the lower brackets" than for the regular tax.