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 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

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-

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

Negative MTC Example 3 from IRS Audit Techniques Guide on the

Individual AMT

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.

Miscellaneous AMT topics

ISO and MTC Capital losses – Regular tax and AMT ISO/MTC benefit of 2006 and 2008 legislation

Planning (and Cautions/Reminders)

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.

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.

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

§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

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”

ISO reporting form

First issued for 2010 §6039 Returns required in connection with certain options

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.

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.

Planning - 3

Watch timing of 4th quarter estimated state income tax payment – December versus January. If already “in AMT” defer payment to January

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.

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.

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.

Planning - 7

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

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

Wrap-up

Read IRC §§53 – 59 Review Forms 6251 and 8801 Other materials on BUS 225K website Take quiz when ready and before deadline