Tax planning and compliance for investors
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By Kaye A. Thomas
Updated February 13, 2008
Misunderstanding leads to unnecessary tax payment.
It's bad enough that the AMT applies to so many people. What's even worse, some people with capital losses are paying this added tax even when they don't have to. The problem can come up even if you never had any special items under the AMT, such as incentive stock options.
Ever since a major revision in 1986, the AMT has worked as a parallel tax. Conceptually, it involves a complete recalculation of your income tax from start to finish, with a different set of rules. When it comes to capital gains and losses, the rules are the same, but the consequences of applying those rules can be different, That's because some of the AMT rules give you different tax basis for assets.
A few years ago, the IRS revised the instructions for the AMT form to make it clear that you can have a different capital loss carryover under the AMT. This wasn't a change in the law, just a clarification in the instructions. But it got the tax software companies to beef up their inputs relating to AMT capital loss carryovers. They ask for your AMT capital loss carryover as well as your regular capital loss carryover. Some people figure they don't have an AMT capital loss carryover and enter zero. As a result, they end up losing the benefit of capital losses under the AMT.
For most people with capital losses, the number is the same for AMT as for the regular income tax. It would take something special on your tax return, such as incentive stock options, to create a difference. When you have a difference, the AMT capital loss is almost sure to be bigger. Unfortunately, some of the widely used tax return software programs have assumed otherwise. Unless you know enough to specify that you have the same carryover for AMT purposes, the software may eliminate the carryover from the AMT calculation. Result: a higher tax under the AMT. Even for an expert, this is an easy mistake to miss.
Example: Suppose you had an overall capital loss of $18,000 from stock trading in 2006. You were allowed to use $3,000 of the loss that year, and the remaining $15,000 carried over to 2007. You ended up with an overall gain of $20,000 that year. After applying the capital loss carryover, you are taxed on just $5,000 of capital gain.
You should have just $5,000 of capital gain in both the regular tax calculation and the AMT calculation. Your $15,000 capital loss carryover is available for both taxes. But your tax software may assume your AMT capital loss carryover is zero unless you explicitly plug the number into the AMT calculation. Even when the software is smart enough to ask about this, many people incorrectly assume they don't have an AMT carryover and enter zero. In our example the mistake would produce an AMT calculation in which the tax applies to $20,000 of capital gain, instead of just $5,000. You might end up paying thousands of dollars in tax that you don't really owe.
If you find yourself with an unexpected AMT liability, check to see how capital losses were treated in the AMT calculation, especially if you have a capital loss carryover.
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