Can I Deduct Investment Losses With the Alternative Minimum Tax Amount?
Original post by Leslie McClintock of Demand Media
The alternative minimum tax came about in 1969 after Congress discovered that a few hundred wealthy people received significant income but, because of tax deductions and loopholes, managed to avoid any significant tax liability whatsoever. The alternative minimum tax, or AMT, removes many deductions and loopholes for taxpayers whose incomes are above a certain amount.
Capital Gains and Losses
If you have an investment and you sell it at a profit, the Internal Revenue Service typically charges you a capital gains tax. For assets held longer than a year, the maximum capital gains tax is 15 percent. If you sell assets at a loss, however, you can use those losses to offset any capital gains for the year, reducing your tax bill. The AMT does not typically change the amount of capital losses you can use to offset capital gains to reduce your tax bill.
Capital Loss Carryforwards
Normally, if you have more capital losses in a given year than capital gains, you can use the losses to wipe out any capital gains tax exposure, plus up to $3,000 per year in ordinary income. You can carry your losses forward year to year, offsetting your capital gains, plus up to $3,000 per year in ordinary income per year until your capital losses are exhausted.
Incentive Stock Options
Under AMT rules, special rules apply to losses incurred from the exercise of certain kinds of stock options. Taxpayers do not normally need to declare gains on the exercise of incentive stock options until they sell. However, under AMT rules, the IRS disallows that benefit, and taxes become due in the year the incentive stock options are exercised. If the incentive stock options are exercised at a loss, however, the same $3,000 limit to carryover offsets against income applies.
Minimizing the AMT Bill
If you suspect you will be subject to the AMT, you may want to put off certain disallowed deductions to a non-AMT year. This is an important part of planning for a windfall. You may delay payment of certain investment expenses, for example, or pre-pay certain deductible expenses to keep them from getting disallowed if the following year is likely to be an AMT year.
- Internal Revenue Service: Form 6251 - Alternative Minimum Tax - Individuals
- Fairmark.com: The AMT Capital Gains Trap; Kaye Thomas; February 28th, 2008
- EdZollars.com: AMT and the Capital Loss Benefit
About the Author
Leslie McClintock has been writing professionally since 2001. She has been published in "Wealth and Retirement Planner," "Senior Market Advisor," "The Annuity Selling Guide," and many other outlets. A licensed life and health insurance agent, McClintock holds a B.A. from the University of Southern California.