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I use a online tax filing software. For this tax year, I exercised non-qualified stock options and restricted stock awards. The income reported on W-2 is now quite a bit high. I understand all stock options and restricted stock awards are "short term gains" and hence taxed as ordinary income.

I itemize my deductions. The only deductions I claim are state tax I paid.
(state tax that has been withheld and state tax I paid last year along with the previous year's return)

- My itemized deductions are limited by some amount because my AGI is too high. This perhaps is nothing to do with AMT?
- In addition, I have to pay AMT based on the computation by the tax software.

Quesiton is this: Is it normal to run into AMT because of high AGI? I don't mind paying the tax, but I thought AMT was there so as to disallow only certain types of deductions for people with high AGI. I don't claim any deductions other than state-taxes I have already paid.

Wherever I read about AMT, I only see referneces to Incentive Stock Options, but that is not what I exercised. I exercised non-qualified stock options and restricted stock awards (stock grants).

thanks,
max401k
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Hmm.. I think I found the answer to my question.

State-taxes are not deductible under AMT system. I live in CA.

The state taxes are higher becuase of my high-AGI (which was the result of exercising Non-qual stock options, grants and other short-term and long-term capital gains)

I went back to another thread that I had started last year and there was a similar response. I am kicking myself at the moment. There was a suggestion in last year's thread to pay less state-taxes (less withholding) and pay the rest in April-2008. I might not have run into AMT if I had done exactly that! I might be paying for my laziness in the form of AMT. Hope this link works to find the old thread.

http://boards.fool.com/Message.asp?mid=25409293&bid=&sort=whole&terms=max401k&vstest=search_042607_linkdefault

Internet search on "AMT state taxes" - comes up with some articles that talk about state-taxes and about their being non-deductible under AMT.

Wish you all a satisfactory TAX-2008!
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Quesiton is this: Is it normal to run into AMT because of high AGI? I don't mind paying the tax, but I thought AMT was there so as to disallow only certain types of deductions for people with high AGI. I don't claim any deductions other than state-taxes I have already paid.

While I am not in the tax business, this will be my third year in a row I've been hit by the AMT.

My understanding is that you can hit the AMT anytime you have a high AGI. This can be caused by something like a high income (in general or due to employee stock options), short term capital gains, or even long term capital gains.

The long term capital gains surprised me (made me hit it the first year), and while it still ended up that my LTCG were still taxed at just 15%, I lost out on some deductions and thus paid an additional $4k or so in fed taxes.

But, due to the ramping nature of the tax brackets, there is a point that someone could be above the AMT. AMT is basically a flat tax at 26 or 28% (depending), with fewer deductions than the normal tax code.

If you put both of those on a graph, you'd have a straight line (AMT), and a curved line (normal). The curved line would start above AMT (AMT has a large initial deduction), dip below the straight line (lets say at $130k, though it depends on a lot of things and so is not a fixed number), and then eventually hits the AMT line again before surpassing it.

With the AMT you pay whichever tax is higher, so basically you pay the normal tax at lower incomes, normal plus extra to bring you to the AMT level in the middle, and back to normal taxes if in the higher incomes.

But in general, anything that raises your AGI (above whatever limit based on your other deductions) can make you get hit by the AMT surcharge.

Hopefully that makes sense, and clears it up a bit.

Aaron
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If you put both of those (Regular tax vs. AMT) on a graph, you'd have a straight line (AMT), and a curved line (normal). The curved line would start above AMT (AMT has a large initial deduction), dip below the straight line (lets say at $130k, though it depends on a lot of things and so is not a fixed number), and then eventually hits the AMT line again before surpassing it.

With the AMT you pay whichever tax is higher, so basically you pay the normal tax at lower incomes, normal plus extra to bring you to the AMT level in the middle, and back to normal taxes if in the higher incomes.


That's true. But there's another factor, which is that it depends on what your AGI is made up of. If your income has a significant amount of qualified dividends and capital gains, you will likely pay AMT from the middle of the 25% bracket on up. But if your income is mostly ordinary income (high salary, deferred comp., IRA or pension, Social Security, and interest, etc.) you will be much less likely to pay AMT.

And the AMT rules have nothing to do with it. It's because the low 15% rate on dividends and capital gains make your regular tax unusally low as a percentage of your income. The same max. rate applies to AMT, but the AMT has fewer deductions, primarily taxes, personal exemptions, and misc. deductions. So a person with the cap. gain and dividend income will pay AMT as a result.

Likewise, a person with a lot of municipal bond interest - and NOT just the private activity bond interest add-back - is more likely to pay AMT. It's because muni. bond interest is an add-back for state taxes - and the higher your state taxes, the more likely you are to pay AMT.

Bill
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