How to Adjust Capital Gains for an Alternative Minimum Tax

By: Steve Lander

The Alternative Minimum Tax, called AMT, is a parallel income tax system that was originally designed to stop a small number of high-income taxpayers from using creative deductions to avoid paying any taxes. It works by eliminating most itemized deductions and by replacing them with a single AMT exemption and a special flattened tax bracket system. While the capital gains rate doesn't change if you pay the AMT, your capital gains interact with it in other ways.

AMT Exempt Income

If you are subject to the Alternative Minimum Tax, the Internal Revenue Service exempts a few different types of income from it. Your long-term capital gains income and your specially taxed dividend income escape the AMT, and benefit from the special tax rates applied to them. In addition, most tax-free municipal bonds also remain tax-free under the AMT. The exception to this rule is any interest that you earn from "private activity" bonds.

Gains and AMT Liability

When the IRS gives, it also takes away. While your capital gains aren't subject to being taxed at the 26- or 28-percent AMT tax rates, they do get added into the income that gets used for AMT calculations. Once your AMT income hits a certain threshold -- $115,400 or $153,900, as of 2013, depending on whether if you're single or married -- you have to subtract 25 cents from your exemption for every dollar of additional income. This means that if you have large capital gains, you'll end up paying AMT on more of your income.

An Example

For example, take a married couple that is on track to make $145,000 in AMT income in 2013. Barring any gains, they'd be eligible to take the full $80,800 exemption, leaving them with $64,200 of AMT-taxable income on which they'd pay the 26 percent rate. If, at the last second, they decided to sell stock and take a $50,000 capital gain, they'd have to add that $50,000 to their AMT taxable income, giving them a total income of $195,000. The IRS will make them subtract from their exemption 25 cents for every dollar of income over $153,900. The extra $41,100 in income over the threshold adds $10,275 to their AMT taxable income, leaving them subject to paying AMT on $74,475 -- the original $64,200 plus the new $10,275. This costs them an additional $2,671.50 in AMT income tax as well as the $7,500 capital gain tax -- 15 percent on their $50,000 gain -- that they also have to pay.

Investment Expenses

The AMT can also blunt the value of your investing activities in other ways. One of the many deductions that the AMT eliminates is the ability to write off miscellaneous deductions that exceed 2 percent of your adjusted gross income. The investment expense deduction is a part of the eliminated miscellaneous deductions.

Special AMT Adjustments

While most taxpayers won't have to make any adjustments to their capital gains under the AMT, there are two specific instances where the AMT can actually change your capital gains tax liability. The first is that if you operate your own business, you may have to adjust your gain or loss on the sale of an asset that your business owns if you have to use a different depreciation system under the AMT. The other instance is that you may have to adjust your basis in stock tied to incentive options when you exercise the option without selling the stock.

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About the Author

Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.

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