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Alternative Minimum Tax. Computation and MTC ISO Changes Planning Considerations. Example - 2009. Taxable income$106,650 Add backs: Personal exemptions 10,950 Taxes 16,000 Home equity interest 4,600 ISO 25,300 Subtotal$163,500

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Alternative Minimum Tax

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Alternative Minimum Tax

Computation and MTC

ISO Changes

Planning Considerations


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Example - 2009

  • Taxable income$106,650

  • Add backs:

    • Personal exemptions 10,950

    • Taxes 16,000

    • Home equity interest 4,600

    • ISO 25,300

  • Subtotal$163,500

  • Exemption amount (67,575) [w/o phaseout $70,950]

  • Total$ 95,925

  • X tax rate x 26%

  • TMT$24,941

  • Regular tax(19,037)

  • AMT$ 5,904


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MTC calculation

  • Per §53(d) – recalculate AMT with only exclusion items. Result is that AMT likely to be higher than this modified calculation.

  • Taxable income$106,650

  • Add backs:

    • Personal exemptions 10,950

    • Taxes 16,000

    • Home equity interest 4,600

  • Subtotal$138,200

  • Exemption amount (70,950)

  • Total$ 67,250

  • X tax rate x 26%

  • TMT$ 17,485

  • Regular tax( 19,037)

  • AMT$ -0-


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MTC Calculation - continued

  • MTC = 53(d)(1)(B)(i)(I) $5,904

  • less (II) ( -0- )

  • $5,904

  • Will carryforward to be used in a year when owe regular tax rather than AMT. Cannot reduce regular tax below TMT.

  • Carries forward indefinitely.

  • Form 8801


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Negative MTC

  • Example 3 from IRS Audit Techniques Guide on the Individual AMT


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Negative MTC example - continued

AMT of $1,664 less AMT with only exclusion items $4,264 = negative $2,600. This is due to the negative depreciation adjustment of $10,000. Means that any MTC carryforward is reduced by $2,600.


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Miscellaneous AMT topics

  • ISO and MTC

    • Capital losses – Regular tax and AMT

    • ISO/MTC benefit of 2006 and 2008 legislation

  • Planning (and Cautions/Reminders)


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Stock Options and AMT

  • Merlo, 100 AFTR2d 2007-5204 (5th Cir.), affirming 126 TC 205 (2006),

    • Involved exercise of ISOs on 12/21/00 with a spread of $1,066,064, which is reportable in calculating AMT.

    • However, M only included $452,025 in AMT using the stock’s FMV at 4/15/01.

    • In 9/01, the company (Exodus) filed for bankruptcy and issued a statement in 11/01 that its stock was worthless.

    • M generated a capital loss for AMT of $1,075,289 in 2001.

    • IRS assessed a deficiency of $169,510 on M’s 2000 return.

    • M argued that the capital loss limitations do not apply for AMT purposes and therefore his 2001 capital loss may be carried back to reduce 2000 AMTI.

  • Court held that capital loss limitations do apply for AMT purposes and that no ATNOL is generated to be carried back to reduce 2000 AMTI. There is nothing in statute to allow a different treatment of capital losses for AMT purposes; thus, they apply.


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First effort to provide MTC/ISO relief

  • Tax Relief and Health Care Act of 2006 (P.L. 109-432; 12/20/06) allows for greater use of the minimum tax credit which should help many individuals who generated large MTCs when they exercised ISOs during a few years back when spreads tended to be large. IRC §53(e) now provides a special rule for individuals with “long-term unused credits” effective for tax years beginning after 12/20/06.


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ISO/AMT/MTC Relief

  • Tax Extenders and AMT Relief Act of 2008 (P.L. 110-343, 10/3/08)

  • §53(e) and (f)

  • For individuals who exercised ISOs, large AMT liabilities, large MTCs they may never be able to use, and stock tanked.

  • Relief for AMT owed for TY ending before 2008 + penalties and interest

  • Accelerate the MTC


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§53(e) and (f)Example

  • 1998 – Gail granted 2,000 ISOs at $10/share

  • 2000 – exercised when stock price was $310

  • 2000 regular tax – no effect

  • 2000 AMT - $600,000 income

  • MTC generated from the ISO = $600,000 x 28% = $168,000

  • 2007 – AGI too high to benefit from §53(e)

  • 2008 – LT unused MTC = portion of MTC attributable to adjusted net minimum tax for TY before the 3rd TY immediately preceding such TY = $168,000


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Example - continued

  • (e)(2) AMT refundable credit amount = amount (not in excess of the LT unused MTC for such TY) equal to greater of –

    • (A) 50% of the LT unused MTC for such TY ($168,000) or

    • (B) amount (if any) of the AMT refundable credit amount determined under (e)(2) for taxpayer’s preceding TY (determined without regard to (f)(2)) ($0)

  • So, Gail’s (e)(2) amount is $84,000

  • If she paid $30,000 of penalty and interest in 2001, it is abated under (f). So her AMT refundable amount and MTC determined under (b) for her first 2 tax years beginning after 12/31/07 are increased by 50% of aggregate amount of interest and penalties paid before 10/3/08 and which would, but for payment, have been abated under (f)(1).

  • In 2009, Gail should get remaining $84,000 and $15,000 refunded.

  • If Gail had had $28,000 of her MTC refunded in 2007, then under (e)(2), the great amount would be $70,000.

  • Rule applies for “long-term unused minimum tax credit for any taxable year beginning before January 1, 2013”


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ISO reporting form

  • First issued for 2010

  • §6039 Returns required in connection with certain options


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Planning - 1

  • Sch C versus Misc. Itemized Deductions

    • Rev. Rul. 92-29

      • “The following expenses are deductible as trade or business expenses in determining the taxpayer's adjusted gross income under section 62(a)(1) of the Code: expenses incurred by an individual taxpayer in preparing that portion of the taxpayer's return that relates to the taxpayer's business as a sole proprietor, and expenses incurred in resolving asserted tax deficiencies relating to the taxpayer's business as a sole proprietor. Expenses incurred in preparing schedules or resolving asserted tax deficiencies relating to profit or loss from business (Schedule C), income or loss from rentals or royalties (Part I of Schedule E, Supplemental Income and Loss), or farm income and expenses (Schedule F), are deductible under section 62(a).”

    • So, be sure to identify all expenses that can be deducted on Schedule C rather than treated as unallowed itemized deductions for AMT purposes.


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Planning - 2

  • §1.163-10((o)(5)

    • If proceeds of home equity loan can be traced to something that produces deductible interest, consider making §1.163-10(o)(5) election to treat the debt as not secured by the home.


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Planning - 3

  • Watch timing of 4th quarter estimated state income tax payment – December versus January.

    • If already “in AMT” defer payment to January


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Planning 4

  • Consider itemized deductions versus standard deduction

    • Itemizing is an election – see §63

    • Cannot deduct standard deduction for AMT

    • But, some itemized deductions are allowed for AMT such as AI interest deduction and charitable contribution deduction.

    • So, if “in AMT” consider itemizing for regular tax even if standard deduction is larger so as to keep AMT lower.

    • Need to perform alternative calculations to see what is best option.


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Planning - 5

  • §266 – “No deduction shall be allowed for amounts paid or accrued for such taxes and carrying charges as, under regulations prescribed by the Secretary, are chargeable to capital account with respect to property, if the taxpayer elects, in accordance with such regulations, to treat such taxes or charges as so chargeable.”

  • Check regs and cases

    • May be able to capitalize some investment type expenditures rather than deduct for regular tax and owe AMT on.

    • Expenditures must be otherwise deductible for regular tax.

    • CCA 200721015 and §1.266-1(b)(1)(iv) – “flat fee paid to a stockbroker for investment services is not a carrying charge under” §266.


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Planning 6

  • If expect to be in AMT next year, but not this year, consider accelerating deductions not allowable for AMT into this year rather than next year if possible.

    • EX – pay off home equity debt (but be sure doing so doesn’t put person “in AMT” this year.

    • Estimated state income tax timing.


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Planning - 7

  • Watch timing of ISO exercise to see if can minimize AMT (and still get good value for the exercise)


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Planning - 8

  • General compliance considerations

    • Be sure AMT considered in estimated tax calculations and payments

    • Have records to show

      • Regular and AMT PAL, NOL and asset basis

      • Passive activity bond interest and related expenses

      • Keep track of when the bonds were issued

        • Some are not subject to AMT

          • Reason – part of 2009 and 2010 economic stimulus legislation

      • Date §1202 stock issued

      • Use of residence debt – definitions not same for regular tax and AMT

        • AMT – no HEI

        • AMT – no interest is residence is a boat or mobile home used on transient basis


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Wrap-up

  • Read IRC §§53 – 59

  • Review Forms 6251 and 8801

  • Other materials on BUS 225K website

  • Take quiz when ready and before deadline


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