Comments on: How Alternative Minimum Tax (AMT) Works

By: Paul @ contractor tax

Paul @ contractor tax — Mon, 11 Jan 2010 04:10:37 +0000

I think people will be much more careful with their money now, I can tell because there are nearly four times more blogs relating to finances after the financial crisis. Lets hope everyone learns from their mistakes!

By: cannon_fodder

cannon_fodder — Mon, 19 Oct 2009 03:23:07 +0000

Thanks, FT, for the concise article on AMT and how it is calculated. I’m creating a complex retirement spreadsheet which includes tax considerations and calculating AMT was one of those things I hadn’t got around to including.

It was only through playing around with taxtips.ca calculators (another reason why Walter Harding isn’t the best source for playing around) that I even saw AMT calculated.

I, too, was on the “give me dividends or give me death” rampage – and then the AMT caused me to rethink it. Looks like we need to move to BC for the best dividend income treatment…

By: Mron

Mron — Fri, 16 Oct 2009 18:20:58 +0000

Mike, put your mind at ease if you have a decent accountant they will find the best mix of dividends or salary to minimize your income tax. If both you and your wife own shares of your corporation (hopefully you both own separate classes) then depending on your other income your accountant should be able to determine the most beneficial amount of dividends to pay on each class of shares.

By: Mike

Mike — Fri, 16 Oct 2009 01:22:19 +0000

Yes, that’s exactly what may work. Thanks again.

By: FrugalTrader

FrugalTrader — Fri, 16 Oct 2009 00:20:29 +0000

Mike, I would suggest that you read the article on dividend sprinkling again. Paying a spouse via dividend who is in a lower tax bracket is a tax strategy that would work well in your scenario.

By: Mike

Mike — Fri, 16 Oct 2009 00:09:33 +0000

Actually, I realized it might work out quite a bit better than I thought. My wife and i are both directors on the corporation, but she’s a stay at home mom. I played around with dividends to both of us and I was able to get the tax calculator to come out around $5000 a year. Jeez, that would be amazing if it’s accurate. I’ve printed out the report and I’ll show it to my accountant. Now if you’ve had enough of the details of my life, I’ll return you to your regularly scheduled programming. :)

By: FrugalTrader

FrugalTrader — Thu, 15 Oct 2009 22:42:41 +0000

lol, yes I was going to suggest taxtips.ca calculator as well. I use that calc all the time and should show you approximately what you owe.

By: Mike

Mike — Thu, 15 Oct 2009 22:37:33 +0000

Hehe, true enough FP. I’m seeing my accountant next week, but I just got suddenly paranoid readiing this article. I did some rough calculations using the calculator at taxtips.ca and by my math I should end up owing in the $14,000 range. We’ve been putting money aside for taxes since I started as a contractor, thankfully. We’ll see if the accountant agrees with my savings amount or if i need to increase it.

By: Four Pillars

Four Pillars — Thu, 15 Oct 2009 22:28:07 +0000

Mike – shouldn’t you be talking to an accountant? I know FT loves doing his taxes but I’m not sure about anyone else’s! :)

By: Robert

Robert — Thu, 15 Oct 2009 22:27:57 +0000

I had no idea how AMT worked before this blog. Who knew blogs could be informative? :)

By: Mike

Mike — Thu, 15 Oct 2009 21:34:58 +0000

FT, thanks for the response. However I’m withdrawing significantly more than the $30,000 you give in your examples in the tax scenarios post. Can you help me run my numbers to get a rough sense of it?

Lets say by the end of 2009 the numbers look like this:

$12,000 in Salary earned in 2 months (approx $2400 income tax paid)
$75,000 in Corporate income earned in 10 months

90% of corporate income used as personal income. We’re trying to get TFSA’s maxed out, and some debt paid off. Hopefully in future years I won’t have to withdraw every nickel from the corp, but for now that’s how it is.

In this scenario, can you help me calculate the rough taxes I would owe both in my corporation and personally?

By: FrugalTrader

FrugalTrader — Thu, 15 Oct 2009 17:40:58 +0000

FS, it’s really depends on what the $500k/year income consists of. If it’s regular income, then it’s subject to regular taxation minus various tax deductions. Note that in Canada, mortgage interest is not tax deductible unless it’s via a HELOC that’s invested.

By: Financial Samurai

Financial Samurai — Thu, 15 Oct 2009 17:27:37 +0000

Hey FrugalTrader,

Do you mind doing the math on this one as it pertains to AMT? Let’s say someone makes $500,000 a year, and has $50,000 in mortgage interest deduction.

What is this person’s rough AMT? Seems like there’s just so much complication and phase out, that implementing a Flat Tax would be so much simpler.

By: FrugalTrader

FrugalTrader — Wed, 14 Oct 2009 22:21:04 +0000

Sorry for the lack of response guys, work has me tied up! However, it looks like questions are in good hands, thanks for the responses! Mike, I've written a few articles regarding taxation of private corporations, check them out: private corporation tax basics private corporation tax scenarios dividend sprinkling

By: Sampson

Sampson — Wed, 14 Oct 2009 22:11:22 +0000

Thanks for the info guys. Seems very unlikely that the only source of income would be dividends if you had >$1.75M in assets. In my own planning, dividends play a significant role, as does real estate, interest, and other income.

Seems the dividend route is most advantageous only if you are 100% dividend income (although as you state FP), 20% is a reasonable taxation rate for these income levels.

By: Mike

Mike — Wed, 14 Oct 2009 19:09:16 +0000

How would this apply to me? I’m employed as a contractor in the IT field. I earned about $12,000 in salary in the early part of the year before switching to contracting (via my numbered corporation). To date this year I’ve earned approx $54,000 in income via my corporation, this should end up in the $75-80k range by the end of the year. My accountant has indicated he’d use dividends to allocate the income we use as a family, but he’s never mentioned this before. Is this something I should be concerned about? Especially going forward next year as my entire income should be coming through my corporation and will likely be higher as well. Thanks to anyone who has advice

By: Four Pillars

Four Pillars — Wed, 14 Oct 2009 17:14:02 +0000

Sampson – if you have a higher income then you will pay income tax on dividends. I’ve calculated that around $100k income any dividends earned on top of that will be taxed at 20% which is still pretty good.

By: Sarlock

Sarlock — Wed, 14 Oct 2009 17:10:36 +0000

Sampson,
If you have other sources of taxable income, you will likely be paying more than the 15% minimum tax on income over $40,000, so the AMT wouldn’t apply.
Do keep in mind that this only applies to higher incomes… if you are retired and have an all-dividend income on a portfolio that yields less than around $50,000 (which is probably over $1 million in investments), you’ll still probably pay $0 tax. I could retire quite comfortably on $50k/year after-tax.

By: Financial Samurai

Financial Samurai — Wed, 14 Oct 2009 16:53:09 +0000

Ahhh, the joy of taxes. It’s all about implementing a FLAT TAX folks! With a flat tax, everything will be clear and simple, not to mention fair!

There’s a raging debate over at Financial Samurai.

By: Sampson

Sampson — Wed, 14 Oct 2009 16:03:16 +0000

Fully agree with Steve.

$3k tax paid on $70k income. Pretty darn favorable still.

Does the taxation of dividends change if you have other large sources of income? Say you have $50k in rental, interest, and other + $70k in dividend income.