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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 120811  
Subject: Re: How does AMT work? Date: 5/15/2002 2:08 AM
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I do have significant investments in the form of stock purchased at a discount through a company Stock Purchase Plan and some NQSOs.

The capital gains on any stock could raise AMT issues. The NQSOs probably won't - it's qualified incentive stock options that carry the big AMT risk.

For the purposes of long-term planning, I'm interested in learning more about AMT--particularly, what triggers it and how it is figured--so that I can hopefully avoid an unpleasant tax hit by cashing in too many investments at one time.

The first place to look is probably at this article in the FAQ: http://www.fool.com/taxes/2000/taxes000915.htm . It should help you identify the AMT issues that could affect you. (If I had some presence of mind when I posted over on the Isle, I could have sent you the link then. Sorry 'bout that.)

Basically, the Alternative Minimum Tax is a parallel tax universe. It has it's own rules about what is taxable income, what is deductible, and what the tax rate is. Theoretically, you figure your income tax in both universes and pay the larger one. Fortunately for most people, the regular tax universe generates the larger tax, making a second tax calculation unnecessary. But if you have one or more of the preference items mentioned in the FAQ, you probably need to check your tax in the AMT universe just to make sure. Most tax programs will do this automatically (assuming that you input sufficient information, of course). If you used one for your 2001 taxes, you might play with it a bit to see how the AMT works.

I'll quickly run through your specific questions, assuming you'll take a gander at the FAQ as well.

So, first of all, does anyone know of anything to watch out for particular to NQSOs or SPP stock?

Long-term capital gains should be the only concern here.

Second, I know that my SPP shares will be partially taxed as earned income (discounted purchase) and partially as capital gains. Are earned income and CG treated the same or differently for AMT calculations?

The same. Although large LT cap gains can cause your other income to be subject to the AMT.

Basically, I'm wondering if I pay CG tax on income if that income will be subject to AMT also.

Yep. But the AMT still includes the favorable tax rate for LT cap gains.

Third, at what level of income (and what kind--e.g., gross, AGI, etc) does AMT come into play? I am married and file jointly.

It could come into play any time your AGI is over $49k. (The figure for Single and Head of Household is about $36k.)

And finally, I read something about a credit for paying AMT in prior years. What's the deal with this?

Some items that cause AMT are because the AMT universe recognizes income before the regular tax universe does. This gives rise to a timing difference - the income is simply taxed at different times. So if you have to pay some AMT because of one of these items, you will get a credit on your regular taxes in a future year to keep you from paying tax twice on the same income. ISO's are a significant culprit for this problem.

Good luck and come back with additional questions as you have them.

--Peter
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