Some assets have a different basis under the alternative minimum tax (AMT) than under the regular tax.
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Your basis in an asset, such as stock or real property, is used to determine how much gain or loss you report when you sell that asset. (Basis may be used for other purposes as well.) In some situations an asset may have one basis for regular income tax purposes and a different basis (usually higher) for alternative minimum tax purposes. When that happens, the AMT gain or loss on a sale of that asset won’t be the same as the regular tax gain or loss. If you’re not alert to this situation you may end up paying more tax than necessary.
What causes dual basis
Ordinarily, your basis for an asset is simply the amount you paid for it plus any costs of acquisition (such as brokerage fees). But various events can cause an adjustment in the basis of an asset. For example, if you claim a deduction for depreciation of an asset, you reduce your basis in that asset by the amount of the deduction.
Some of the things that cause an adjustment in basis under the regular tax have a different treatment under the alternative minimum tax. For example, you may have to use a less favorable depreciation schedule for AMT purposes than you use for the regular tax. That means you’ve claimed smaller depreciation deductions for that asset under the AMT, and as a consequence will have a higher basis in the asset.
Example: Over the years you’ve used a piece of equipment that cost $20,000, you’ve claimed depreciation deductions of $12,000, leaving you with an adjusted basis of $8,000. During those same years, your AMT depreciation deductions for the same piece of equipment were $9,000. That means your AMT basis is $11,000.
Incentive stock options
One very important circumstance where you can have dual basis in an asset is when you exercise an incentive stock option. You have to report an adjustment for AMT purposes when you exercise an incentive stock option. As a result you may end up paying alternative minimum tax. But another result is that your AMT basis in the stock is increased by the amount of the adjustment.
Example: At a time when your company’s stock was trading at $80 per share, you exercised an incentive stock option to purchase 500 shares at $24 per share. For AMT purposes you report an adjustment of $28,000 ($56 per share) if you hold the stock past the end of the year. The result is that you hold stock with a basis of $24 per share for regular tax purposes and $80 per share for AMT purposes.
Sale of a dual basis asset
When you sell a dual basis asset, you report the difference between the regular tax gain or loss and the AMT gain or loss as an adjustment. If your AMT basis is higher (as is usually the case), you report this item as a negative adjustment. The result may be to reduce the amount of AMT you pay or increase the amount of AMT credit you can use.
Example: In the preceding example, you held stock with a basis of $24 per share for regular tax purposes and $80 per share for AMT purposes. If you sell the stock for $100 per share and have no other capital gains or losses, you should report a negative adjustment of $56 per share on your AMT calculation. If you have to pay AMT in the year of the sale, this adjustment will reduce your alternative minimum tax liability. If you don’t have to pay alternative minimum tax in the year of the sale, the adjustment may make it possible to claim a larger portion of your AMT credit in that year.
The difference between the regular tax gain or loss and the AMT gain or loss isn’t necessarily the same as the adjustment you reported when you exercised the option.
Example: You exercised an ISO with a spread of $50,000. During the period you held the stock its value declined, and you sold it for a profit of $12,000. Under the AMT you had a loss of $38,000, but because of the capital loss limitation only $3,000 of this loss is allowed in the current year (unless you have other capital gains to absorb the loss). The difference between your regular tax gain or loss (a gain of $12,000) and your AMT gain or loss (a loss of $3,000) is $15,000, and that’s the amount of the adjustment you report when you sell the stock. You also have an AMT capital loss carryforward you can use in future years to recover more of your AMT credit if you didn’t recover the entire amount in the year you made this sale.