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Showing posts from May, 2008

AMT and Long-Term Capital Gain

Here's how you can encounter the alternative minimum tax (AMT) because of a long-term capital gain.

Congress didn't intend for the alternative minimum tax to apply merely because you have a long-term capital gain. When Congress reduced the capital gain rates in 1997 and again in 2003, it provided that the lower rates would apply under the AMT, too. But the way it works out, you may still pay AMT because of a large long-term capital gain.

The AMT exemption

A major reason for paying AMT in the year of a large capital gain is the AMT exemption. This is a special deduction that's designed to prevent the alternative minimum tax from applying at lower income levels. The problem is that the AMT exemption is phased out when your income goes above a certain level. For this purpose, capital gain is considered income, so it can reduce or eliminate your AMT exemption.

For example, if you're single and your income under the AMT rules is $112,500 or less, you're allowed an AMT exemp…

TAX IMPLICATIONS OF SELLING YOUR HOME

Careful planning is the key to keeping most of the profit from the sale of your residence. Under current law, a married couple filing a joint return can exclude from income up to $500,000 of the gain made on the sale of their principal residence. For a single person, the amount of tax-free gain can be up to $250,000. The magnitude of this tax break makes it critical that you plan to ensure that you qualify.

In the past, you were only eligible for a tax break if you rolled the profit of your home sale into your next residence and the sales price of the residence sold exceeded the cost of the new residence. Now, in addition to the $500,000/$250,000 exclusion, you no longer have to wait until you are 55 years old, to elect to exclude all or part of the gain and you can take advantage of this tax break more than once in your lifetime.

Second Homes and Rental Homes: If you have a second home from which you also live, go to work from or otherwise treat as your primary residence (say, every ot…