February 27, 2008 - Phil Hodgen

Mwahahaha we found a hole in the Internal Revenue Code

Calm down. It only applies to a small group of people (who, incidentally, are our customers). Probably not you. Who? Nonresidents have high U.S.-source long term capital gains.

The AMT rules can create alternative minimum taxable income greater than the actual capital gain. Translated into English: Imagine making $100 of capital gain in real money and having the IRS say your tax should be calculated as if you made $110.

Let’s just say that the people who wrote the Internal Revenue Code didn’t bother to synchronize the Alternative Minimum Tax rules with the rest of the Code. The explicit tax rate applicable to nonresidents is cheerfully ignored for AMT purposes.

Let’s also say that this is yet another instance the Lazy Penalty applies. Interpretation: don’t go blindly using an income tax return preparation program without understanding–REALLY understanding–what is happening.

Tax and Trusts