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I have some employee stock options that are coming up for a year that I have held them. Will the gain be have to be calculated for AMT purposes? In other words is it possible that capitol gains related income can put you over the threshold?

TIA
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I have some employee stock options that are coming up for a year that I have held them. Will the gain be have to be calculated for AMT purposes? In other words is it possible that capitol gains related income can put you over the threshold?

Your question is a little bit unclear to me. I'll explain how AMT and stock options work. You also would do well to go to http://www.fairmark.com/amt/index.htm to read up on the subject.

To answer your last question first, it's not capital gains related income that puts you over the threshhold with regard to AMT; the AMT hit comes, if at all, when you exercise the option in the first place, if the "bargain element" is big enough to put you over that threshhold. If your "preference item" income exceeds about $30,000 -- the exact number varies based on filing status and income -- then you're in AMT territory, if the stock options in question are Incentive Stock Options (ISOs), as opposed to Non-qualified Stock Options (NQOs).

The bargain element is the difference between the option price and the market price at the time of exercise. The bargain element of NQOs is taxed as regular income at the time of exercise; the bargain element for ISOs is not taxed at the time of exercise, but is to be considered as preference item income for AMT purposes.

So if you were taxed at the time you bought those shares, then they were NQOs and you're home free with regard to AMT. Of course, you are still subject to normal capital gains taxes on any increase in value that has taken place since you bought them. Your basis, however, again if they're NQOs, is the market price on the day you exercised them, not your option price. (That's the positive side of paying income tax on the bargain element!)

There's a lot more to this subject, however, than we've covered so far. A LOT. If you'd like to pursue this more, let us know whether your options were ISOs or NQs and any other details (did you pay regular income tax at the time of exercise, for example?) that would help us understand your situation.

mathetes
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>> There's a lot more to this subject, however, than we've covered so far. A LOT <<

There's even a whole MFool message board devoted to Employer-Granted Stock Options. You can get there by typing "Stock Options" into the "Board" window below (and hitting Find, then following the links) - or else just click here:

http://boards.fool.com/registered/Messages.asp?id=1040021000000000

Of course, that's a suggestion, but not an endorsement ... in my biz, we don't get "stock options", so I've never been to the "ESSO" board.

- D
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Oh I am a fool, little "f". I typed options by mistake, I meant stock purchase (from my employer). I will have held them for a year shortly, and since I know all about how AMT shafts me with regards to my options, I was wondering whether these options that I own will be subject to AMT if the income/ratio puts me over the limit.

I suppose another way to ask this is, if I lived only on capital gains income (i.e. selling shares where the gain is only subject to capital gains tax), would I ever have to pay AMT?

TIA
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Thanks for the link to the fairmark site - it had good artical on capital gains and AMT. Heh, basically I'm shafted ;)
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Oh I am a fool, little "f". I typed options by mistake, I meant stock purchase (from my employer). I will have held them for a year shortly, and since I know all about how AMT shafts me with regards to my options, I was wondering whether these options <<There you go again!!>> that I own will be subject to AMT if the income/ratio puts me over the limit.

prowley -- you probably should do yourself a big favor and talk with somebody in your compensation department, or with a qualified tax advisor -- somebody, in any event, who can get all the parts really clear and who understands the taxes.

Alternatively, you may want to take on the task of educating yourself. For that purpose, you can do no better than starting at the following site, which deals with a variety of ways to acquire employer stock.

http://www.fairmark.com/execcomp/buying.htm

My opinion is that AMT does not apply here, not in a negative way. Capital gains are taxed as capital gains. The whole point of AMT is to catch significant gains that aren't otherwise caught. So, for example, the "bargain element" in ISOs can be used by highly paid executives in companies where the stock has appreciated a lot, to increase their wealth by hundreds of thousands of dollars just through buying the stock. Hence, an event that would not normally be taxable but is, essentially a privileged affair and, moreover, one that most people would view as "income like," would not be taxed, were it not for AMT. Similarly, the other "preference items" that are included in AMT's web are other events or transactions that may have the effect of shielding or hiding income; a certain amount of shielding is acceptable, but beyond that threshhold, AMT kicks in.

Your capital gains are in the open; they will be taxed as capital gains. End of story.

That's an amateur's opinion, and I'd be surprised to learn otherwise..... but please, somebody, let me know if I'm off base.

mathetes
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Thanks for the link to the fairmark site - it had good artical on capital gains and AMT. Heh, basically I'm shafted ;)

OK, I'm surprised. Tell me why you're shafted.

Tell us all why, assuming it can be done without revealing inappropriate personal details......

mathetes
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Sure, that's what us Fools are all about after all ;) I shall give it a go (I have been studying AMT for various reasons recently), but to read up go here:

http://www.fairmark.com/amt/ltcg.htm

From this article:

"But the way it works out, you may still pay AMT because of a large long-term capital gain."

...

"For example, if you're single and your income under the AMT rules is $112,500 or less, you're allowed an AMT exemption of $33,750. Normally that's enough to prevent you from paying AMT unless you're able to claim special tax benefits that reduce your regular tax. But suppose your income is around that level before you add a $150,000 capital gain (sale of a real estate investment, or stock, or perhaps sale of a business you built up). Your tax on the capital gain is 20% under both the regular tax and the AMT: $30,000. But under the AMT, the added income wiped out your AMT exemption."

Also, this type of AMT does not qualify for a credit - since it is not based on deferred income. Personally I have a huge problem with AMT, without giving too many details, I have a large portfolio of company stock options, and also a sizeable portfolio of company stock purchases. The first of the stock purchases is coming up for the one year one day rule for capital gains.

I am attempting to diversify my portfolio (which right now is all in company stock, and if you saw how much $$ I had tied up in this one stock you would have a heart attack) in the most tax efficient manner possible. Unfortunately, due to AMT, it seems this is simply not possible - though I have a decent income, the stock I have to sell would put me over the limit for AMT (I believe, still got to do the calculations) - my situation has the added complexity that I am never quite sure what I will earn in a year (due to bonuses etc.), so precise calculation of what I can afford to sell is nigh on impossible.

Also, I can only excercise a fraction of my options in one year without AMT giving me a tax bill based on a huge unrealized income that may very well go away, and since AMT appears to apply to capital gains income too, I had better not sell any of that type of stock that year either. Now moving on to the really awful part - even if I paid the AMT and got the AMT credit for the options, when I came to sell I would be liable to AMT under the capital gains income rules (I am supposing that the stock gains in value at the rate it has thus far), and that means I would not be able to use my credit - the credit can only be used in years you are not subject to AMT. What is truly frightenning about this, is that if you do very well and make your retirement income very good, Uncle Sam will kick you back down with AMT. Now if the AMT regulations, including the figures for its calculation continue to go unchanged to account for inflation, as it seems to have done for years and years, then that sum that that gets you AMT on your capital gains could well be very low compared to what is a livable income (my guess is that by that point this law will be repealed - if everybody gets shafted it will change). Nonetheless it is a frightenning prospect.

It strikes me that this tax must have bankrupted many people. For example, someone excercises $1,000,001 worth of stock options for say a $1. He pays the AMT tax ($280,000 on loan, since he has realized nothing to pay the tax with). Now he is the proud owner of a $280,000 AMT credit (which he's never likely to be able to cash in) and a $280,000 loan (perhaps a second morgage). Oh boy, how many who did something like this saw their stock crash before they actually realised any gain? If I knew anything about your US constitution (I'm a Brit), I could probably point out that it's unconstitutional to tax the people on what they *might* earn. Never heard of such a thing anywhere else, even in the darkest hours of British history - however unfair, those nasty Kings always taxed you based on something you had. This is the real Rock n Roll swindle in my view.

Did they shoot the guy who invented this tax? I'd like to volunteer :)

Disclaimer: I'm just a victim trying to find out how much of a victim I am, so any or all of this info may be innaccurate. And I have never, or intend to ever, shoot anyone :)

Hope something here helps.
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prowley writes (in part):

It strikes me that this tax must have bankrupted many people. For example, someone excercises $1,000,001 worth of stock options for say a $1. He pays the AMT tax ($280,000 on loan, since he has realized nothing to pay the tax with). Now he is the proud owner of a $280,000 AMT credit (which he's never likely to be able to cash in) and a $280,000 loan (perhaps a second morgage). Oh boy, how many who did something like this saw their stock crash before they actually realised any gain? If I knew anything about your US constitution (I'm a Brit), I could probably point out that it's unconstitutional to tax the people on what they *might* earn.

I reply:

Lord knows I'm no fan of the AMT, but I think your "parade of horribles" goes too far. In particular, I disagree with characterizing this hypothetical as taxing the option-holder on what they might earn. He/she has earned the economic gain. As in any other situation, to avoid market risk, all that's necessary is to sell the stock at market value; in other words, to realize the gain, simply sell the stock. Borrowing money (whether you need it for taxes or any other reason) in order to buy or retain stock is, to me, the economic equivalent of buying on margin, with all the attendant risks and benefits.

By the way, I've never needed to deal with the AMT so I could easily be wrong, but isn't there a concept known as the "AMT basis" that allows you to enjoy the equivalent of an "AMT credit" when you finally sell the stock? --Bob
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prowley

Thanks for the education.

Now you've got me worried. I thought I understood AMT pretty well; in fact, I do for ISOs..... but this aspect that you've pointed out is a new one, and it concerns me for exactly the same reason that it concerns you..... down the road when I start selling stocks that I've acquired through exercising options, is this capital gains Catch-22 going to interfere with the credit that I was looking forward to????

AMT is indeed not one of the prettier aspects of our American taxation systems.

mathetes
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Lord knows I'm no fan of the AMT, but I think your "parade of horribles" goes too far. In particular, I disagree with characterizing this hypothetical as taxing the option-holder on what they might earn. He/she has earned the economic gain. As in any other situation, to avoid market risk, all that's necessary is to sell the stock at market value; in other words, to realize the gain, simply sell the stock. Borrowing money (whether you need it for taxes or any other reason) in order to buy or retain stock is, to me, the economic equivalent of buying on margin, with all the attendant risks and benefits.

By the way, I've never needed to deal with the AMT so I could easily be wrong, but isn't there a concept known as the "AMT basis" that allows you to enjoy the equivalent of an "AMT credit" when you finally sell the stock? --Bob


Bob

Since you've never had to deal with AMT, let me jump in in prowley's defense. What he's describing may be hyperbole to a certain extent, but it's the kind of hyperbole that people are moved to undertake after they have dealt with AMT.

Yes, indeed, your networth has increased when you exercise Incentive Stock Options, your wealth has increased, and that's what AMT is catching. Nevertheless, it is true that the AMT was designed, historically, to prevent the really wealthy from avoiding taxes altogether, playing games with the kinds of things that are itemized under "preference items" in AMT.

What's been happening in recent years is that more ordinary people have been caught unawares by the sudden increase in value of their ISOs, given by companies with literature that states "ISOs may be exercised without tax consequences," as contrasted with the NQOs that are taxed on exercise as normal income. I know many very ordinary people, not high income types, who were totally blind-sided by the AMT because of misleading (well-intentioned, but misleading) statements even from tax and financial advisors.

My introduction to it came several years ago when I sought advice on some potential ISO exercises that would have produced "preference item" income in the neighborhood of $100,000. Several tax and financial planning people did alert me to AMT but it was with words like "probably encounter"...."might incur" AND it also was with "but you'll get a credit and in later years..." SO, they all said, "you don't need to worry about it." So when it actually hit me that I owed well over $20,000 that I didn't have (since it was all in paper) I too used expressions like "being taxed on money I haven't received."

What I've learned since, and practiced since, is a much more unequivocal message: IF your preference items exceed about $30,000 (exact amount varies with filing status and income), THEN you will encounter AMT, and it will be a significant percentage (~28%), and, although you will get a credit, you will need to come up with cash to pay the tax bill before you get the cash on which you owe that tax!

AMT is all very manageable, and even understandable, but it needs to be faced with greater clarity and less equivocation.

mathetes
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