Alternative minimum tax

1. 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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

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