Alternative minimum tax

1. Alternative minimum tax • Designed to ensure taxpayers with substantial amounts of income pay income tax • If alternative minimum tax exceeds regular tax liability, then pay AMT • Essentially a second income tax system • Even “not so rich” taxpayers are increasingly paying AMT • 4.1 million in 2007 • Up to 26.8 million in 2009 if no fix???

2. AMT Taxable Income (AMTI) • Starts with regular taxable income • Plus/minus adjustments • Plus tax preferences • Minus AMTI exemption • Equals AMTI

3. Adjustments • Depreciation • Separate calculation of AMT depreciation • In general, less depreciation in initial years • Other adjustments generally only apply to those with oil and gas properties

4. Adjustments • No standard deduction or personal exemptions allowed • These amounts have increased in recent years

5. Adjustments • Itemized deductions for AMTI • Medical expenses allowed only to the extent they exceed 10%, not 7.5% • State income taxes aren’t deductible • Interest on home equity loan not used for improvements • Real estate and other property taxes aren’t deductible • Miscellaneous itemized deductions aren’t deductible • Regular tax: amount over 2% of AGI • No reduction of itemized deductions by 1/3 of 3% when AGI exceeds allowable amount

6. 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

7. 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

8. Preferences • Incentive stock options (ISOs) • Upon sale • If stock has increased in price between date option was vested and date option was exercised, AMT basis will exceed tax basis. Consequently, on sale of stock AMT gain will be smaller than capital gain

9. 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

10. 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

11. AMTI Exemption • MFJ • $69,970 in 2008; ($45,000 in 2009) less • 25% of AMTI over $150,000

12. AMT Rates/Credits • All other than MFS • 26% of first $175,000 • 28% of all amounts over $175,000 • AMT Credits • Adoption credit • Child tax credit • Retirement savings contribution credit • 50% of retirement contributions up to $2,000 per person • Phaseout begins at $33,000

13. Minimum Tax Credit • Available if AMT due to timing differences • Carried over for three years • Then refunded starting in fourth year at 20% per year for next five years