Is there any 1% minimum tax on taxable-income [similar to AMT for high-income] when you are in low 15% bracket and have substantial long term capital-gains?

e.g. US, single, std-deduction, 2014.
ordinary-income = 16150, capital-gains-LT = 20000. So Taxable-income (TI) is 25000 [std-deduction+personal-exemption =10150]

Since 15% bracket runs till 36900, cap-gain tax is 0% Ordinary income that is taxable is only $5000 and at 10%, tax is $500.

But tax software shows tax as $500 + 1% of TI = $500+$250 = $750 [I suspected bug in software, but want to know if I'm missing some tax code]

That is effectively there is a 1% tax on capital-gains. What am I missing? I thought the tax should be just $500 and no tax on the capital-gains.


So, lets get it straight. I'm using 2014 numbers and my Intuit tax software:

Regular Income: 16150
Capital Gains:  20000
AGI:            36150
Deduction:       6200
Exemption:       3950
Taxable Income: 26000
Tax:              603
ACA Tax:          260
Total Tax:        863

Let's ignore the ACA tax here, it comes into play since you didn't mention anything about the ACA mandate insurance.

Looking at the calculation worksheet (page D-14 here) - the account is right (the tax amount may be a bit off, since the tax tables are still not updated for 2014).

You have $20000 capital gains, and $6000 ordinary income. Capital gains are taxed at 0, as expected. Ordinary income is taxed at $603, per the tax tables.

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  • Thanks; I wasn't aware of this ACA and 1% penalty; I stay outside US so I guess I should get this ACA excemption (Not Lawfully Present). So I believe my tax should be 603 and not 863. [BTW yes there was a mistake in my calculation that my taxable ordinary income is $6000 and not $5000] – Karthik S Nov 23 '14 at 6:29
  • What 1% penalty? – littleadv Nov 23 '14 at 9:12
  • If no health-care-insurance, the penalty is minimum $95 or 1% of income-above-$10k. I think this ACA tax is the penalty. kff.org/infographic/… – Karthik S Nov 23 '14 at 11:46
  • Is this ACA-tax mandatory or I should be able to avoid it? I used the online taxslayer.com website; even when I say I have health-insurance, it still says my final tax is $863. It finds tax-due as $603; but in final Total-tax gives it as $863. • Standard or itemized deductions $6,200.00 • Subtract line 40 from line 38 $29,950.00 • Exemption amount $3,950.00 • Taxable income $26,000.00 • Alternative minimum tax $0.00 • Tax due $603.00 • Adjusted Tax $603.00 Total Tax hide details $863.00 – Karthik S Nov 23 '14 at 14:35
  • @KarthikS There's a special form to add to your tax return. These forms have been drafted, but not yet formalized. See here for more details: irs.gov/pub/irs-pdf/p5156.pdf – littleadv Nov 23 '14 at 22:39

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