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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R

rick++

I read somewhere Congress was going to fix this hole circa 2000,
but then came Enron, 9-11, and Bush tax cuts and the bill was
overlooked.
 
S

Susan Grossman

I read somewhere Congress was going to fix this hole circa 2000,
but then came Enron, 9-11, and Bush tax cuts and the bill was
overlooked.
Rick,
Let's be adults.
Talk is what politicians do when they don't want to do anything.
They talk so you believe they are doing something about it.
If Congress actually wanted to do something, they would have long ago done
something. That, at least, is simple.

The fact is, the AMT destroys ordinary people like me in way that costs us
more in taxes than our entire income. The AMT nearly ruined me (it took
about five years from my life savings alone wiped out by Congress. Talk
isn't going to give me my bank account and mortgage back.

All I want to do is find a simple way to UNDERSTAND how to get OUT of this
AMT tax-calculation hell now that I'm deeply mired in it due to a tax-naive
ISO exercise during the bubble.

The hard-to-understand part is that I paid AMT taxes on my "entire" income
yet the AMT tax was "mostly" based on the tax-naive exercise of a single
ISO option ... yet there is a prior year's AMT credit form that I have to
fill out every year that just boggles my mind.

Given that I already paid my huge AMT taxes due mostly to an ISO exercise,
and given that there is a prior year's AMT credit that I am theoretically
able to get back - yet given I am in a huge-tax state, is there any way to
get out of Congress' AMT tax-calculation hell before I die in frustration?

Does anyone understand AMT well enough to simplify how I get out of it?

Sue
 
B

Blash

Susan Grossman wrote on 2/14/07 11:19 AM:
Is there an easy way to describe how I can get out of this AMT tax
calculation hell?
You don't mention if you had talked with a tax attorney who should be
able to answer your question(better than a group that feels it noteworthy to
mention a $300 stock purchase....)
 
A

arthur

With all sympathy you are due, I must ask the question, Why do you ask
this now after having paid the assholes in Congress? Worse case you
could have cashed out and moved to an Island in the Caribbean.

I keep saying this but so what
Dump the Congress and give the President bigger guns
 
J

Jim Kingdon

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.
Yes, but you'll get that money back in a future year. An AMT hit
related to incentive stock options just moves things around from tax
year to tax year (sometimes disastrously, as you have found out). It
isn't like an AMT hit due to large deductions.

See form 8801, "credit for prior year minimum tax".

As for the paperwork, yes you are stuck with it until you have gotten
back that AMT money.

I'll also agree with the other poster - since the amount of money at
stake for you is so large, consider professional advice if you are at
all unclear on this. It isn't clear to me from your post whether you
are paying many thousands of dollars more than you should. Someone
who knows what they are doing should be able to figure that out, and
file amended returns for you if necessary.
 
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S

Susan Grossman

Yes, but you'll get that money back in a future year. An AMT hit
related to incentive stock options just moves things around from tax
year to tax year (sometimes disastrously, as you have found out). It
isn't like an AMT hit due to large deductions.
Hi Jim Kingdon,
Your response was helpful. The part that really confuses me is that the ISO
was "mostly" what kicked me into AMT but according to my accountant, it's
impossible to say that the AMT was exactly what kicked me into the AMT as
the AMT calculation takes into account dozens of things like state income
taxes, car property taxes, donations, etc.

So, the part of "getting the money back" that really confuses me is that
you don't pay 'directly' for the ISOs yet they 'mostly' are what kicked me
into the AMT tax calculation hell.

I have to fill out half the forms twice, once for the "regular" tax system
and another time for the "alternative" tax system. All because I'm trying
to claw my way out of AMT hell.

IN the end, I end up with two adjusted gross incomes, one called the "AGI"
for the regular tax purposes - the other called the "AMT AGI" for the
alternative tax system.

Then we calculate a tax based on two wholly different systems, where one
system has one set of deductions and percentage tiers, and the other has a
whole DIFFERENT set of (fewer) deductions and (fewer) percentage tiers.

In the end, whichever is worse is the tax I pay.

The problem is that I can't figure out ahead of time whether I'll be paying
by the alternative tax system or by the regular tax system. Year after
year, I find that sometimes all my deductions are thrown away (due to the
AMT system winning the battle) and other years my marginal last dollar is
taxed through the roof (due to the regular tax system winning the battle).

Is there ANY way to guesstimate which tax system is the one we'll end up
paying by, say, November of the tax year? Does anyone understand this
alternative tax system well enough to summarize how to guess which one will
win on April 15th?

I'm desperate to get out of AMT tax-calculation hell!
Sue
 
S

Susan Grossman

I'll also agree with the other poster - since the amount of money at
stake for you is so large, consider professional advice if you are at
all unclear on this.
When I found out that my taxes were vastly more than my income, I
immediately went to an accountant who confirmed that dastardly fate for me.

It was then that I decided to always vote the bastards out but that's a
political discussion that has no bearing here except to say that paying
more in taxes than you earned has given me undue stress and dislike for the
evil US Congress. They sit fat and happy while simple folk like me are
wiped out by their rules and regulations. I'll take that Congressional pain
to my dying day and pass on the feelings to my children. They will never
get my vote ever again for anything that so much as raises my taxes another
dime as giving more than 100% is about the most I can bear.

Oh my. I'm sorry. I did say I wished to stay out of politics. The point
only is that I am forced to use an accountant who every year tells me that
I don't qualify for the massive AMT credit I have amassed unless I either
make hundreds of thousands of dollars or nothing for a few years.

He said that I can only get back the DIFFERENCE between the two tax systems
which year after year don't amount to anything like the amount of credit
carried forward every year.

TO make matters worse, every year the IRS asks for my 6251 a few months
after tax day, saying I owe even MORE! Luckily every year, like clockwork,
they back down once they see the 6251 which, strangely, isn't required yet
they ask for it every year.

The main problem I have is that I can never figure out which tax system
will be the one I will be taxed under until it's too late. That wouldn't be
so bad if the rules weren't basically opposite in each system. So not only
does the AMT ruin my life financially (it even was a major factor in my
divorce as my husband at the time didn't want to empty the bank accounts
and mortgage the house just just pay our taxes) but the AMT makes my
planning useless.

In the one system, you defer income and you accrue deductions; in the other
system you accelerate income and you defer deductions. But, if you don't
know which system you'll be hit by until April 15th of the next year, you
can't plan.

Is there an algorithm to guesstimate, say in November, which system is
going to rule your life for that tax year without doing your entire taxes?

Sue
 
A

arthur

The tax code is DESIGNED to work against you.
examples:
1. Investments are always fully taxed if profitable but limited if
losses
2. Retirement AGI income beyond 25K causes SSI income to be taxed
which effectively increasing your taxes in retirement
3. Marriage penalty eliminates or reduces certain deductions

I'm sure there are other examples.

Oh, btw, what are you calling income? This is a much mis-used and
abused term.
 
S

Susan Grossman

Oh, btw, what are you calling income? This is a much mis-used and
abused term.
All I have is income from three sources:
1. My W2 from my employer (almost all my income)
2. My interest & (paltry) dividents from bank accounts & stocks
3. My gains/losses on open-market stock sales

What Congress thinks is also income was my exercise of an ISO option (my
only ISO option I've ever had in my life). I BOUGHT the stock. I never made
a dime on it (and never will). Within a few months, that stock had
plummeted along with many others.

Yet, CONGRESS thinks that I gained vastly more than my entire income (the
three things above, mostly my W2). I don't consider this income as I never
got any money from it.

Am I abusing the term "income"?

Sue
 
R

rick++

I am informed that such a AMT-relief law was passed on the last day
of last years congress, but it spreads it out over many years.
Hope your accountants dont overlook this change in your snideness.
 
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S

Susan Grossman

If you haven't done so already, submit your post to misc.taxes.moderated.
They have very knowledgeable folks in that newsgroup.
I did and they responded with this page talking about the AMT for options:
http://fairmark.com/amt/index.htm

Despite the fact that AMT 101 web page starts by saying the AMT tax "is so
complicated that it's often difficult to predict", the page does attempt to
explain the basic items that kick ordinary people into AMT hell.
http://fairmark.com/amt/topten.htm

What was most interesting was THIS page, saying the AMT rules changed
temporarily for 2007 for those with ISO options, perhaps allowing me to
finally exit the AMT tax hell in 2007 if I do the "right" things at the
right time.
http://www.fairmark.com/execcomp/credit-relief-3.htm

However, I may already have screwed up because I ditched all the nearly
worthless 2001 exercised ISO stock in 2006 in my accountant's suggested
attempt to get out of the AMT tax hell (bearing in mind I wouldn't even go
to him if it weren't for the horrors of the AMT for ISOs in the first place
as I think I can compute my own taxes otherwise).

I dumped everthing (at a huge AMT loss but at 1040 gain) because my
exercised ISO shares have a dual-cost basis.

Basically they have a tiny cost basis in the "regular" tax system - but
they have a huge cost basis in the "alternative" tax system.

This horrible dual-basis tax system for stocks is mind boggling to me but
here is the suggested page to explain it.
http://fairmark.com/amt/dual.htm

I hope other ordinary people don't ever get ruined by the "alternative" tax
system like I was.

Sue
 
A

arthur

No, but the IRS does.

Did you consider tax court? Was there a professional opinion on that
route? Congress writes the tax law and then discovers that they
allowed legal methods of reducing taxes. HOW terrible! Then throw
together laws designed to counter the effects of using their laws.

If you were excessively taxed then the intent of the law is subverted
to causing you a hardship. That to me sounds like material for a
court to decide. The IRS hates possible losing tax court cases as the
Congress gets mad at them. Also time consuming and therefore costly.
 
B

Bill Reid

Susan Grossman said:
I hope other ordinary people don't ever get ruined by the "alternative" tax
system like I was.
Since "ordinary people" like to cheat the government out their taxes,
a lot of "ordinary people" get "ruined" by the AMT after they first
"craftily"
ignore AMT implications when exercising ISOs.

EVERY single person I have known personally (and have
read about) who got "ruined" by the AMT after exercising
ISOs was FULLY aware of the implications of the AMT,
but they became intoxicated with the idea of cheating the
government out of the difference between taxation on "ordinary
income" and long-term capital gains. In most cases they cashed
out some of their stock to buy expensive houses and cars, and
then screamed poverty when the government came looking for
their AMT obligations ("THE BASTARDS ARE TRYING
TO TAKE MY HOME FROM ME!!!").

Since I always just sold my stock after I exercised my options
and paid huge taxes on "ordinary income" as a result, I never
came close to "AMT hell", but I did have to endure the snide
sniggers from certain financial geniuses who tried to "help" me
be as "smart" as they were at avoiding taxes like I was mentally
retarded or something...you might call that "non-AMT hell", but
at least it was temporary, at least on THAT issue...
 
S

Susan Grossman

Since "ordinary people" like to cheat the government out their taxes,
a lot of "ordinary people" get "ruined" by the AMT after they first
"craftily" ignore AMT implications when exercising ISOs.
I wish I was as crafty as those people you are talking about as I paid more
in taxes than I made. I wouldn't call that crafty. That was my ignorance
that cost me my savings and my mortgage.
EVERY single person I have known personally (and have
read about) who got "ruined" by the AMT after exercising
ISOs was FULLY aware of the implications of the AMT
You are most decidedly wrong on this one. Almost nobody, and certainly not
any ordinary person, can possibly be fully aware of the implications of the
AMT. I certainly wasn't. But don't take my word for it. Look at what the
tax experts have to say at:
http://www.fairmark.com/execcomp/credit-relief-2.htm
These tax experts say the AMT ramifications are "enormously complicated"
and "mind boggling".

In fact, these tax expers show an example where if you get a 50,000 dollar
bonus, you'll actually pay MORE in taxes than the bonus. You're better off
turning down the bonus. Don't believe me? Read the article.

Given the enormously complex nature of the AMT, I don't believe an ordinary
person can possibly be fully aware of the implications of the AMT.

If you think you understand the ramifications of the AMT so well, then why
don't YOU explain to me here in this thread how I would get out of the AMT
tax-computation hell I am currently in.

If it's so simple, that is.

Sue
 
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A

arthur

Bill, I am totally blown away by your post. Reading what you have
written over a long time I find it hard to understand your seemingly
economically uneducated remarks. You seem to have no knowage of the
history of individual taxation in the USA. You seem to completely
ignore the constant government taxation called Inflation. What is
going on with your head? Hope it isn't terminal.

Please do not waste your time replying to me as I am not interested in
wasting my life debating absurd belief systems if that be the case. I
can only assume you are coming from a parochial opinion of some sort.

a
 
B

Bill Reid

Susan Grossman said:
I wish I was as crafty as those people you are talking about as I paid more
in taxes than I made. I wouldn't call that crafty. That was my ignorance
that cost me my savings and my mortgage.
Same thing happened to them...in some cases, when informed that
if the stock price went down they would still get hit with the AMT,
and maybe wouldn't be able to pay for the tax by selling all their
stock, their response in some cases was, "Just let them try to FIND
the money! BWHAHAHAHAHAHAHA!!!"
You are most decidedly wrong on this one.
You know my PERSONAL experiences and what I've read?

I will allow that it is possible that somewhere there might be
an actual befuddled person who made an honest mistake of
inadvertance regarding AMT and ISOs...I've just never personally
met or read about that person...
Almost nobody, and certainly not
any ordinary person, can possibly be fully aware of the implications of the
AMT. I certainly wasn't.
In regards to the exercise of ISOs at the time, it was a relatively
straightforward matter to roughly calculate your AMT obligation,
and in all cases I PERSONALLY am aware of EVERYBODY
exercising ISOs received a giant honkin' WARNING at the
time of exercise that they would most likely incur an AMT
tax. They chose to ignore it, and then further ignore it as
the stock price fell, and ignore it even more the more it
fell...
But don't take my word for it. Look at what the
tax experts have to say at:
http://www.fairmark.com/execcomp/credit-relief-2.htm
These tax experts say the AMT ramifications are "enormously complicated"
and "mind boggling".
Not interested, not looking, because this probably has nothing to do
with what I posted about, which was what you posted about, which
was AMT on ISOs. I generally agree that the tax code is ridiculously
complicated, but that's not the point.
In fact, these tax expers show an example where if you get a 50,000 dollar
bonus, you'll actually pay MORE in taxes than the bonus. You're better off
turning down the bonus. Don't believe me? Read the article.
I'm not reading the article, because you didn't receive a "bonus",
you didn't post about a "bonus", and I didn't post about a "bonus".
One notable thing about ALL people who claim to have been "burned"
by the AMT after exercising ISOs is their dexterity at changing the
subject...
Given the enormously complex nature of the AMT, I don't believe an ordinary
person can possibly be fully aware of the implications of the AMT.
What does this have to do with the AMT on ISO exercises back
around 2000? Do you keep changing the subject because you actually
WERE "fully aware" of what your tax obligation would be when you
chose your particular exercise "strategy"?
If you think you understand the ramifications of the AMT so well, then why
don't YOU explain to me here in this thread how I would get out of the AMT
tax-computation hell I am currently in.
Another notable thing about people "burned" by the AMT on ISOs
is they think that the universe owes them something more than what
the law allows. You made a mistake, a mistake of GREED, your
so-called "hell" is actually just another ridiculous wrinkle in the tax
code that was added as a political sop to all the other greedy people
who got "burned" making the same kind of mistake, which is precisely
why the tax code is so monstrously complicated in the first place.
It's just a another political football batted about by greedy lazy
hypocritical whiners looking for handout.
If it's so simple, that is.
It WAS simple, you DELIBERATELY have always chosen the
COMPLICATED but GREEDY route. In almost all likelihood,
you were offered a no-brainer "cash-out" ISO exercise that would
have automatically withheld all your tax liability at the time of the
exercise. You rejected that very simple, routine, and very financially
rewarding plan because some other greedy idiot told you that you
would be "smart" to avoid some additional possible taxation in the
future by taking the MUCH more complicated and RISKY route
of holding the stock.

You WERE warned about the RISK, you just lost your "bet" big
time, and are now still dragging it out and whining about it years later.
Here's how you get out this "hell": fuggedaboutit. You blew it, blew
it big time, now the only question is whether you can learn and grow
from your mistake. Next time somebody gives you a simple deal
involving money, just take the simple deal like your true proverbial
"ordinary person", and don't sit around trying to figure out how
to make an extra few percent more than us "idiots" who actually
took the simple deal and advised you do the same...

This is actually excellent advice I'm giving you, but another notable
thing about people who got "burned" by AMT on ISOs, they have
an amazing ability to filter out any advice that involves taking personal
responsibility and doesn't involve slamming or cheating other human
beings...
 
B

Bill Reid

Bill, I am totally blown away by your post.
I'm still blown away by guys who say they're leaving the group
then turn around and double their posting volume...actually, I'm
not really blown away, just kind of bored after years of seeing
this sad behavior...
Reading what you have
written over a long time I find it hard to understand your seemingly
economically uneducated remarks.
Maybe you just have poor reading comprehension overall, and
also don't know jack about the actual subject being discussed here...I
certainly didn't post anything about "economics"...
You seem to have no knowage of the
history of individual taxation in the USA.
I probably have about the same or better "knowage" of the history
of taxation in the USA as the proverbial "ordinary person". It's just
another monstrosity of political nonsense.
You seem to completely
ignore the constant government taxation called Inflation.
Yeah, not surprising because inflation was not the thread topic,
and of course "inflation" is not "taxation"; it can only be referred to
that way constructively and rhetorically, or, in short, POLITICALLY.
What is
going on with your head? Hope it isn't terminal.
Clear thinking and telling the truth can occasionally be a liability
in a sufficiently amoral and anti-intellectual society...
Please do not waste your time replying to me as I am not interested in
wasting my life debating absurd belief systems if that be the case.
Ah, excellent troll, pops. Now I see why you never left the group,
you fit it too well with all the other idiotic geriatric provocatuers
here...it's
your home away from the rest home...
I
can only assume you are coming from a parochial opinion of some sort.
The truth is that you're a lonely old man whose only avocation is
to idiotically troll Usenet groups. I not sure how "parochial" that
"opinion" is, but there it is...
 
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S

Susan Grossman

I will allow that it is possible that somewhere there might be
an actual befuddled person who made an honest mistake of
inadvertance regarding AMT and ISOs...I've just never personally
met or read about that person...
Well, you've read about me! :)

I was absolutely unaware of the tax ramifications of exercising my ISOs
which was my first stock exercise in my entire life.

But, don't take me for your example to read about. Take John Kerrey.
http://www.nationalreview.com/comment/mcmahon200504190755.asp

Apparently John Kerrey also lives in a high-tax state (I live in California
where not only my taxes are high but since our houses cost five times what
others' cost, we are subject to our high mortgage interest and kids also
kicking us into AMT tax calcuation hell).
http://money.cnn.com/2005/03/23/pf/saving/willis_tips/

Now you can't publically state you've never read about anyone who was
ignorant of the huge complications of the AMT! :)

Sue (with a smile)
 

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