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Subject:   ISO / AMT Question
Date:   Wed, 24 Sep 2003
From:   Mike

I exercised an ISO during 2001. The exercise price per share was $11.67 and the FMV was $27.80. I reported the excess of the fair market value of the shares over the option price on line 10 of Form 6251, resulting in $19,933 of AMT.

Since Uncle Sam did not make this simple and allow me to change the stock basis per share from $11.67 to $27.80, so everything could be handled on Schedule D, I'm lost.

I assume, if I sell the shares in 2003 for $30, I get credit for the $19,933 of taxes already paid by somehow using Form 8801 and Form 6251, and somehow the gain on Schedule D is offset. What goes on what line?

Thanks,
Mike

Answer

Date:   Fri, 03 Oct 2003

Hello Mike,

Have you considered using a paid tax return preparer?

Read the instructions for Form 6251 and Form 8801 carefully.

You should prepare a second Schedule D, labeled "Alternative Minimum Tax". The capital gain on that form is computed using the AMT basis of $27.80 per share.

The negative adjustment for a lower gain on Schedule D for AMT versus regular tax is reported on line 16 of Form 6251. The AMT tax using the maximum capital gains rates is computed at Part III of Form 6251.

The credit for prior year minimum tax is computed on Form 8801. First, compute any minimum tax for exclusion items, like state income taxes, at Part I of the form. You arrive at the potential credit available at line 21 in Part II of the form. (If all of the credit was related to exercising the ISOs, your amount would be $19,933.)

Enter your 2002 regular income tax liability, minus allowable credits, at Line 22. Enter the 2002 tentative minimum tax from Form 6251, line 33 at Form 8801, line 23. The limitation for the credit is entered at Form 8801, line 24 and equals line 22 minus line 23. The minimum tax credit allowed for 2002 is entered at Form 8801, line 25 and Form 1040, line 53 and equals the lesser of Form 8801 line 21 or line 24. Any unused minimum tax credit is entered at Form 8801, line 26 carried forward to 2003 and equals Form 8801 line 24 minus line 25.

If your gain is taxable as a long-term capital gain, you may not be able to use the entire minimum tax credit, because the AMT rate that applied when the option was exercised was 26% or 28%, but the maximum rate for long-term capital gains is 20%.

Good luck!

Mike Gray

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IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this answer was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.