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What is the AMT rate for long term capital gains?

February 16, 1999

From:  Anthony Diepenbrock
Date:  Thu, 11 Feb 1999

Dear Taxtrimmers,

There is a question going around about whether long term gains in the AMT system are taxed at 26%/28% or at the new 20%. Turbotax program suggests that it's 20% but some CPAs say is 28% and that Congress needs to fix this anomaly.

What do you say?

Tony Diepenbrock

Answer

Date:  Sat, 13 Feb 1999

Tony,

Thanks for writing.

There should be no controversy about this issue.

The 20% maximum tax rate also applies in computing the alternative minimum tax. See Internal Revenue Code Section 55(b)(2).

However, basis adjustments can reduce the amount eligible for the maximum capital gains rate. For example, the basis in computing capital gains for stock received by exercising an incentive stock option is increased for AMT reporting purposes by the tax preference reported in the year of exercise.

Teri exercised an ISO in 1998 for $1,000, resulting in an AMT tax preference of $99,000. In 1999, Teri sold the stock, held for more than one year, for $120,000. Teri has a $119,000 long-term capital gain, eligible for the 20% maximum tax rate, for computing the regular tax. Teri has a $20,000 long-term capital gain, eligible for the 20% maximum tax rate, for computing the alternative minimum tax.

An AMT tax basis increase, reducing AMT capital gain, can also result when less depreciation is allowed in computing the alternative minimum tax than for the regular tax.

Mike Gray

Response

From:  Anthony Diepenbrock
Date:  Mon, 15 Feb 1999

Dear Michael,

Thanks for your response. As I understand you, based on your example, the following is true:

The basis for Teri, in the regular tax system, in the year of sale of a previous year preference item, is the exercise price.

The basis for Teri, in AMT system, in the year of sale, is (exercise price + AMT tax preference).

So for the purposes of computing AMT there is a basis adjustment, but for the regular tax system there is no basis adjustment for tax paid.

Teri first pays AMT on $99,000 (say it's about $16965), in the year of exercise, assuming Teri is single and gets the full exemption amount. Then Teri pays (0.20 * $119,000 = $23,800) in the year of sale, assuming Teri is in the regular tax system in the year of sale.

Teri gets NO adjustment for the $16965 paid in the year of exercise in the regular tax system, but instead gets a credit based on the amount Teri's regular tax exceeds the tentative AMT in the year of the sale.

Now the question is whether the $16,965 Teri paid in the year of exercise is ever fully recovered in the tax credit. What if Teri has no regular income during the years in which Teri has the credit? Is the credit lost?

Answer

Date:  Tue, 16 Feb 1999

Tony,

The unused AMT credit is carried over indefinitely until it is used, somewhat like a capital loss carryover for individuals. The only way Teri will lose the credit is if she dies before using it.

Here is a small technical comment about the fourth paragraph of your restatement of the rules. I would say, "So for the purposes of computing AMT, there is a basis adjustment, but for the regular tax system there is no basis adjustment considering a tax was paid in the year of exercise."

Good luck!
Mike Gray

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