Alternative minimum tax  Reasons for increase in taxpayers subject to AMT Reduction in regular income tax rates Standard deduction and personal exemptions adjusted for inflation  AMT exemption is not Fewer credits allowed against AMT  All credits allowed against regular tax

What causes AMT Following not deductible for AMT  State income taxes  Property taxes  Home equity loan interest not used for home improvements What is deductible for AMT  Charitable contributions  Mortgage interest other than above exception

What causes AMT  Credits allowed against regular tax Child tax credit Education credit Dependent care credit Adoption credit Residential energy credit  Credits against AMT Child tax credit Adoption credit

Preferences  Incentive stock options (ISOs)  Income tax implications ( regular, AMT, basis) Upon grant  Option price must be equal to stock price (110% of stock price for > 10% owner)  FMV stock thru option exercise must be < $100,000 per year  Expiration: 10 years from date of grant  Typically a portion vests each year (maybe 20% each year) Can only be transferred on death of employee

Preferences  Incentive stock options (ISOs) Upon exercise  Basis is equal to option price  Difference between option price and the value of stock on date of exercise is an AMT preference item  Exercising option before stock price increases reduces preference item but does subject employee to risk associated with ownership of the stock  AMT basis is equal to stock price on date of exercise; not option price  Higher basis for AMT if price has increased

Preferences  Incentive stock options (ISOs)  Holding period requirements  Long-term capital gains (15% maximum rate) if:  Stock sold more than two years after option was granted  Stock sold more than one year after option was exercised

Preferences  Incentive stock options (ISOs)  Disqualifying dispositions  if:  Stock sold less than two years after option was granted  Stock sold less than one year after option was exercised  Bargain element (stock price on date of exercise and the option price) is compensation income taxed at ordinary rates  Difference between sales price and exercise price is taxed at capital gains rates  If stock price falls after exercise, then have a capital loss subject to $3,000 annual limitation

AMT Planning Techniques  Incentive stock options (ISOs) Stagger exercises so ISO preference is below amount which would create AMT Then when sell stock, which creates a negative AMT adjustment, exercise more options If stock price falls after exercise sell stock  Disqualifying disposition  No AMT issue as AMT and regular tax gain will be same

AMT Planning Techniques  NQSO No limits on granting NQSOs At exercise,  FMV stock – exercise price = Additional salary for employee  Subject to payroll taxes Deductible salary for employer  Employee exchange shares of company to pay exercise cost

AMT Planning Techniques  Move income into AMT year Until regular tax = AMT If regular tax rate normally > 28% and AMT due to preference such as ISO Reduce 401(k) contributions, for example

AMT Planning Techniques  Move deductions into non AMT year Unfortunately, difficult to not pay:  State income taxes  Property taxes