Can I ever get out of AMT hell (after a tax-naive ISO exercise)


S

Susan Grossman

Is there an easy way to understand the ramifications of AMT for ISOs?

After the stock bubble burst, I was left with an AMT tax
which was far greater than my entire income due to my
exercise of an ISO stock option. I had to empty my bank
account and remortgage my house just to pay taxes on money
that I never made (and never will make) due to my lapse of
understanding of the horrors of the AMT for ordinary people.
Trust me, if a five-foot-two inch petite lady ever goes
postal in Congress, you can look me up!

My problem is I still don't understand how to get OUT of the
AMT calculation horror. I still own the (nearly worthless
now) shares of that ISO that kicked me into the horrors of
the AMT. Yet, every year since, I've had to fill out a
miriad of alternate tax forms.

Basically, because of the horrors of Congress' Alternative
Minimum Tax system, I have to repeat the horrors of the
regular tax system, twice, and with wholly different rules.
For example, I have to fill out form 8582 passive activity
loss limits twice, once with regular calculations, the other
with AMT calculations. Same with the CA3801. Twice. Same
with 8801 AMT prior year calculations. Twice. And the list
goes on.

Everything seems to turn topsy turvy with the Alternative
Minimum Tax system - for example, a 29.5 year depreciation
turns into a 40-year depreciation.

The question I'm leading up to, in exhausted exasperation,
is whether or not there is a way to UNDERSTAND the AMT such
that I can figure out how to (finally) get out of it given
that the single item that kicked me into the huge AMT (more
than my income) tax was a naive exercise of an ISO stock
option. That stock is now nearly worthless so I've paid far
more in AMT taxes than the stock is currently worth.

I ask in almost complete exasperation ...

Is there an easy way to describe how I can get out of this
AMT tax calculation hell?
 
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S

Susan Grossman

ich said:
read http://www.fairmark.com/execcomp/credit-relief-1.htm
and then find a tax preparer who understands it.
Oh my! I just read about your suggested 2007 AMT relief
page http://www.fairmark.com/execcomp/credit-relief-1

I read it. I didn't fully understand it. Worse, I don't know
if I've already screwed up again by selling in 2006 all
those (nearly worthless) ISO shares that kicked me into the
AMT in the first place. Basically I was trying to get OUT of
the AMT by getting rid of the stocks that put me into the
AMT.

Ironically, I'll have to pay a long-term capital gains tax
on my selling of these ISOs even though I've already paid an
AMT tax far greater than the ISO can even sell for because I
exercised the ISOs for a few dollars when the stock was
"worth" almost a hundred dollars. Now that stock has tanked
to the single digits.

So, in the "regular" tax system, I've made a profit of a few
dollars a share - but in the "alternative" tax system, I've
paid ten in taxes, more than ten times what I sold the stock
for in 2006. I sold only to get out of the AMT hell.

Now, after reading your suggested article on the AMT tax
credit changes, I'm worried that I did exactly the wrong
thing in 2006.

I will send your URL to my accountant immediately and ask if
there is anything I can do in the 2006 tax year to still
qualify.

Thank you for your astute advice.
I wish I had asked sooner.
Sue
 
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J

joetaxpayer

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S

Susan Grossman

oetaxpayer said:
forbes just had an article on this;
Oh my. After reading the suggested Forbes article, and the
awfully mean tax article
(http://articles.moneycentral.msn.com/Taxes/CutYourTaxes/DontGetBittenByThisAwfullyMeanTax.aspx)
I realized that I'm subject to the AMT credit limitations
kicking in at $156,400 but, being ignorant of this new law,
I sold in 2007 much of the nearly worthless ISOs that kicked
me into the AMT in the first place.

The bitter irony of all this is that in the alternative tax
system, I paid roughly fifty dollars a share in taxes alone
yet in the regular tax system, I actually made a profit of
about five dollars a share.

So, in the regular tax system, I STILL OWE MORE TAXES on the
money that, this time at least, I actually made .... but in
the alternative tax system, I already paid far more in
alternative taxes than the stock was worth.

Problem is that the fifty dollars a share in taxes was
really not ONLY from the ISO exercise but was also from my
high California income tax, my high California schedule E
depreciation, my high California second mortgage, and even
my six kids' deduction (now some are out of the nest but the
AMT tax hell hit me five years ago when they were all on my
1040).

I tried the online alternative minimum tax tool but got
confused when it didn't ask for the other tax timing items.
(http://ezinearticles.com/?Alternative-Minimum-Tax---Online-Tool&id=124802).

SO, my question is how do I separate the alternative tax
paid for just the ISOs from the alternative minimum tax paid
for the other tax preference items which also kick us into
the AMT? And, then, what about California?
 
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