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Author: BigBooty Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121482  
Subject: AMT and LTCG Date: 3/6/2000 7:11 PM
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Hey TMFTaxes and everybody else out there!

I lucked out and joined web startup about 18 months ago. I had ISO stock options, which I excercised in May. The company has since gone public and done really really well.

So, it's now early march. 2 more months and I've got long-term capitol gains. But that 1 stock is like 99% of my portfolio, so I've obviously got a lot of market risk.

My question is in regards to AMT. I live in California, and I know that State Income taxes will eat away at any AMT credit I get every year. Earning enough income to collect a signifigant ammount of the AMT would be really hard.

So, any money that I pay in AMT is probably down the drain. If we assume that is true, it seems to me there is no tax disadvantage to me selling a big chunk of stock now. For example:

75,000 salary
200,000 short term capitol gains
400,000 long term capitol gains
-----
675,000: I'd pay 28% to uncle sam

or
75,000 salary
600,000 long term capitol gains
---
675,000: I'd still pay 28% to uncle sam. Only difference is a highter % of it would be "short-term-capitol-gains" tax instead of "AMT" tax.

The only way that I can figure it makes sense not to sell some now is if long term capitol gains don't count towards AMT.

So, having provided the context, that's my big burning question. Does long-term-capitol gains count towards AMT?

If any one has any thoughts or advice, I humbly await your feedback.

Regards,
bigbooty



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Author: foolishtomtom One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 31052 of 121482
Subject: Re: AMT and LTCG Date: 3/6/2000 7:25 PM
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If you treat 200K as a disqualifying ISO exercise, kiss away your 28% fed tax bracket - you're looking at 39.6% plus 9.3% to our friends at Franchise Tax Board.

Man, oh man, you have a lot to learn. First thing to do is get yourself over to http://www.fairmark.com.


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Author: BigBooty Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 31064 of 121482
Subject: Re: AMT and LTCG Date: 3/6/2000 9:38 PM
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Hey foolishtomtom!

28% isn't my tax bracket, it is the alternative minimum tax rate (I'm dumb, but I ain't stupid).

And the excercise was at .90 when the fair market value was 4$ (current price is 750$, split-adjusted). So I haven't gotten myself into any tax trouble yet.

My question is "do long term capital gains count towards AMT".

If I take a LOT of money from long term gains (@20%), and long term gains count towards AMT, then I would be taxed at the alternative minumum tax percentage(again, 28%) if my total gains if that amount was greater than your normal taxes(which it surely would be. My salary is nothing compared to this money).

I plan on holding a large portion for long term gains. With that in mind, it seems that i can sell a smaller chunk for short term profits with no real tax disincentive, since I know I'm stuck paying the Alternative Minimum Tax (28%) in either case.

Unless long-term capitol gains don't count towards AMT, in which case there would be a BIG incentive to hold out for 2 more months(since it would be 20% vs 40%). Somehow, that would seem unfair (isn't the point of AMT to make sure that EVERYBODY pays at least 28%?, NO MATTER WHAT)? But it would sure benefit me, so I'm hopefully askingthe boards.

Anybody else out there with experience with AMT brought on by collecting long-term-capitol-gains? I'm sorry that original post was unclear. 28% isn't my tax bracket, it is the AMT %, which I will surely hit if LTCG apply towards AMT.

Thanks for the URL, by the way. I've got a dif't book but I think I'll buy that one as well.

thx
bigbooty

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 31135 of 121482
Subject: Re: AMT and LTCG Date: 3/7/2000 11:37 AM
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<<My question is "do long term capital gains count towards AMT".

If I take a LOT of money from long term gains (@20%), and long term gains count towards AMT, then I would be taxed at the alternative minumum tax percentage(again, 28%) if my total gains if that amount was greater than your normal taxes(which it surely would be. My salary is nothing compared to this money).
>>

Directly, your long term capital gains (no matter how large) don't impact your AMT. The problem is that the larger your long term gains, the quicker your AMT exemption is eaten up...which will make the AMT available to your "other" income. It's goofy, but it's true. So a large long term gain could quite possibly cause you to be zapped with the AMT.

<<Unless long-term capitol gains don't count towards AMT, in which case there would be a BIG incentive to hold out for 2 more months(since it would be 20% vs 40%). Somehow, that would seem unfair (isn't the point of AMT to make sure that EVERYBODY pays at least 28%?, NO MATTER WHAT)? But it would sure benefit me, so I'm hopefully askingthe boards.>>

You've got some misconceptions on the AMT. As has been pointed out, the Fairmark site is well suited for your questions, and your additional reading on the AMT.

<<Anybody else out there with experience with AMT brought on by collecting long-term-capitol-gains? I'm sorry that original post was unclear. 28% isn't my tax bracket, it is the AMT %, which I will surely hit if LTCG apply towards AMT.>>

Again, large capital gains WILL trigger the AMT through the back door. Bet on it.

<<Thanks for the URL, by the way. I've got a dif't book but I think I'll buy that one as well.>>

If you are doing any planning dealing with options as compensation, then you really MUST buy Kaye's book entitled "Consider Your Options". I don't know what book you currently have, but Kaye's book is the most comprehensive that I've read...on both the option planning and tax planning side.

TMF Taxes
Roy


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Author: LoTax One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 31141 of 121482
Subject: Re: AMT and LTCG Date: 3/7/2000 11:54 AM
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We can save you $$$ $$$ $$$ $$$. Do we have your attention??

This will sound repetitious: First thing to do is get yourself over to http://www.fairmark.com.

Second thing to do is to get to an experienced professional who has tax projection software so that you get some *valid* conclusions about your tax liability rather than just "therefore I'm in the 28% bracket" which may not be dumb, and may not be stupid, but *will* turn out to be misleading.

Here' my read on the situation: If you think you have tax-planned for the sale of your option shares, but you can't explain "disqualifying disposition" and you don't know what an "alternative minimum tax credit" is, wise and experienced professionals are telling you to slow down, read a little, and use a professional.

We're trying to save you $$$$$$$$$$$$$$$, remember?

Hint: the AMT eats state tax deductions, not the other way around. pay your state taxes when they will do you some good. that's probably not the year that you have an AMT liability. but you won't know until too late, as it stands now.

--
LoTax



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Author: BigBooty Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 31163 of 121482
Subject: Re: AMT and LTCG Date: 3/7/2000 3:46 PM
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Thanks TMFTaxes!
Your point about the AMT hitting my non-LTCG money is valid. And you're right about LTCG being exempted from AMT, which was my question.

I've ordered the book and have an appointment with a CPA in 2 weeks.

from Form 6251 (Alternative Minimum Tax - Individuals), Part IV (Line 24 Computation Using Maximum Capital Gains Rates).

"When computing AMT, you use the following computation:
LTCG * .20 + (All other Income) * .28"

-bigbooty

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