Taking capital gains or converting a traditional IRA to a Roth IRA may increase your state and local tax obligations. Higher state and local taxes, in turn, are among the most common reasons that taxpayers must pay the alternative minimum tax (AMT).
Regardless of whether you’ll owe state or local income tax, taking capital gains or converting to a Roth IRA will increase your reported income, for regular tax and AMT purposes. As your AMT income goes over certain levels, a phaseout reduces your AMT exemption. Thus, higher income may increase your exposure to the AMT.
The bottom line is that taking sizable capital gains or converting a large traditional IRA can throw you into the AMT. If you’re planning to incur such added income, check first with your tax pro to see if you’re better off spreading that extra income over two or more years, to keep from paying the AMT.
