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taxmanrog
taxmanrog, Certified Public Accountant (CPA)
Category: Tax
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Experience:  Licensed CPA, MA, MST with 29 year's experience. Teach Accounting and Tax courses at Masters level.
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In tax year 2011, I paid an AMT tax on Incentive Stock Options

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In tax year 2011, I paid an AMT tax on Incentive Stock Options that I exercised but did not sell in 2011. My gains on the Incentive stock options were $275,000.00 which I reported on Form 6251 Line 14. This resulted in an AMT tax of $95000.00. Of the $95000.00, I was able to carryover a Minimum Tax Credit of $92000.00. I was devastated by the additional $95000.00 in tax so that caused me to sell my ISO stock in 2012. No questions as it relates to tax year 2011.

In tax year 2012, I sold about 65% of my Incentive stock options and reported the gain on both Schedule D and AMT Schedule D and on Form 6251 Line 18 I reported a negative $. Since I had no AMT in 2012, I was able to use $15000.00 of the minimum tax credit against my 2012 taxes. I was limited to $15000.00 because of the AMT floor. In 2013, I was able to carryover a minimum tax credit over of $77000.00. After all was said and done in 2012, I received a tax credit of $15,000.00 but still owed the IRS an additional $26000.00 in taxes which really seems unfair since I had this $77000.00 minimum tax credit with the IRS.

In 2013 and future years, I was told that the following could occur as it relates to my $77000.00 minimum tax credit carryover:

a. I may continue to receive more small portions of credit each year
b. I might not get any credit in a given year,
c. I may lose some of this credit because of the net minimum tax on exclusions
d. If credit exists after 4 years, I can take 50% of whats left and get a tax refund.

Does this sound realistic or do I need a new tax man.
Submitted: 1 year ago.
Category: Tax
Expert:  PDtax replied 1 year ago.
Welcome to the site. I will be helping you today.

Please allow me a few minutes to review the tax treatment and your fact pattern. I will advise shortly.


Expert:  PDtax replied 1 year ago.
Hi Joe,

You aren't the first to have problems understanding the tax treatment of ISO's. The AMT tax people often have to pay for the first time, combined with the timing of the income and subsequent decline in value of the shares, is a common problem with these arrangements. The standard advice is to exercise the ISO's the year you receive them.

First, the easiest idea to grasp. The minimum tax credit is just that, a tax credit available against AMT. You can use just enough to zero out your AMT addition, since the prior year AMT paid is treated as just that, a prepayment. When the minimum tax adjustments and preferences reverse, the prepayments would theoretically be usable.

In prior years, some of the prepayment was refundable.

You might want to verify the application of IRC 53 (e) to your credit for tax year 2012. There may be some refundable credit available to you. Complete IRS Form 8801 for the calculation, or verify that the form was prepared for 2012 applicability.

Secondly, to confirm the tax treatment of the prepayment:

IRS considers ISO's a tax preference, and taxed them before you actually sold the shares. When the regular income tax would take effect (when you sold the shares), the prepayment of that tax should be usable against future AMT, so that you will eventually even out. What most people find is that they get in AMT for the ISO year, and then not again, so the credits can't be used.

I am looking into the 2013 application/utilization of the min tax credit, and will follow up shortly. I'm PDtax.
Expert:  PDtax replied 1 year ago.
In 2013 and future years, I was told that the following could occur as it relates to my $77000.00 minimum tax credit carryover:

a. I may continue to receive more small portions of credit each year NO
b. I might not get any credit in a given year, YES
c. I may lose some of this credit because of the net minimum tax on exclusions YES
d. If credit exists after 4 years, I can take 50% of whats left and get a tax refund. NO

The explanation or lack of one regarding the refundable AMT credit particular to ISO's is troubling, but your facts might not have generated a refundable AMT credit (it would have had to have been more than the nonrefundable AMT credit for a usable refundable credit to be available). Complicated? Yep. But often misunderstood or poorly explained.

I must say that your part 2 responses, to what happens in 2013 and beyond to your Min Tax Credit, are not how I understand the law going into the future. I would ask your tax pro to review those requirements again with you.

Thanks for asking at Just Answer. Positive feedback closes out your question, and follow up is of course welcome. I'm PDtax.
Customer: replied 1 year ago.

Why were your answers to item a. and d. - no


 


Maybe my questions in a. and d. were not clear. So I will re-word my questions:


 


a. Based on my projected tax situation in 2013, is it not possible that I may only receive part of the $77,000.00 minimum tax credit to offset my 2013 tax liability. If so, why would the answer not be YES.


 


d. If the credit exists as a long term credit under Section 53 (e) it appears that I can take 50% of the remaining credit. Maybe it is after the 3rd year not the 4th year. Is that true?


 


 


 

Expert:  PDtax replied 1 year ago.
a. Based on my projected tax situation in 2013, is it not possible that I may only receive part of the $77,000.00 minimum tax credit to offset my 2013 tax liability. If so, why would the answer not be YES. You are correct, you could get some relief if you are in AMT in future years, but only to the extent of AMT.





d. If the credit exists as a long term credit under Section 53 (e) it appears that I can take 50% of the remaining credit. Maybe it is after the 3rd year not the 4th year. Is that true? No. I do not see any refundable credit available after 2012. 53(e) relief was for 2012 and prior years.
Customer: replied 1 year ago.

Does that mean that there is a possibility that the remaining $77000.00 credit may never get used up in future years.

Customer: replied 1 year ago.

You made the following statements, what do they mean?


 


1. You can use just enough to zero out your AMT addition, since the prior year AMT paid is treated as just that, a prepayment.


 


What does zero out your AMT addition mean? - what is an AMT addition? Can you provide an example?


 


 


2. When the regular income tax would take effect (when you sold the shares), the prepayment of that tax should be usable against future AMT, so that you will eventually even out. What most people find is that they get in AMT for the ISO year, and then not again, so the credits can't be used.


 


Are you saying that the minimum tax credit is not usable against future AMT tax but you feel it should be?


 


If I am subject to the AMT tax in future years, are you saying I will not be able to use the minimum tax credit for those years?


 


So does that mean that the minimum tax credit is usable when I have no AMT tax just a regular income tax?


 


If that is the case, Is my minimum tax credit limited to the difference between my regular tax liability and my AMT floor amount.


 


 

Expert:  PDtax replied 1 year ago.

1. Yes, you may never get to use your min tax credit, at least until you sell all your stock options off and recognize regular income or capital gains.

 

2. The min tax credit will be usable in 2013 and future years to reduce your AMT to your regular tax burden, or floor. I do not know of any 50% use, three or four year use of the min tax credit as a refund, etc.

 

Thanks again for your questions, and thanks from Just Answer.

Customer: replied 1 year ago.

YOU DID NOT ANSWER THE REST OF MY QUESTIONS ON SUNDAY JULY 28, 2013 AT 1:29 P.M.?


 


THANKS


 

Expert:  PDtax replied 1 year ago.
You made the following statements, what do they mean?





1. You can use just enough to zero out your AMT addition, since the prior year AMT paid is treated as just that, a prepayment. Min tax credit usable to regular tax floor.


What does zero out your AMT addition mean? - what is an AMT addition? Can you provide an example? AMT addition is my label for any AMT over regular tax amount calculated.


2. When the regular income tax would take effect (when you sold the shares), the prepayment of that tax should be usable against future AMT, so that you will eventually even out. What most people find is that they get in AMT for the ISO year, and then not again, so the credits can't be used.


Are you saying that the minimum tax credit is not usable against future AMT tax but you feel it should be? That the min tax credit is usable against AMT in the future. That when you sell the stock, you should be able to use much of the min tax credit.

If I am subject to the AMT tax in future years, are you saying I will not be able to use the minimum tax credit for those years? No. That the credit will indeed be available for AMT application in future years. The problem is that now the min tax credit is only available against AMT, and no refund provision exists.


So does that mean that the minimum tax credit is usable when I have no AMT tax just a regular income tax? No, just when you have an AMT liability.


If that is the case, Is my minimum tax credit limited to the difference between my regular tax liability and my AMT floor amount. Already answered.
Customer: replied 1 year ago.

You stated that the minimum tax credit is usable only when you have an AMT liability. I found that the following 3 scenarios below completely take an opposite position.


 


INTERNET TAX ARTICLE


The Alternative Minimum Tax (AMT) credit lets you recoup money you had to pay as an AMT in a prior year. You can only claim this credit in a year when you don't have to pay AMT. You can't use the credit to reduce your AMT liability in the future. However, you can carry forward any unused portion of the credit to future years.


 


Chicago CPA TAX FIRM


Called Grieco, Kurtzke, & Adelman LLC and spoke to one of their CPA's who is very familiar with AMT & Minimum Tax Credit carryovers and they agreed with the above statement that you get the credit when you do not have an AMT tax.


 


TAX MAN


Called my tax person - he projected future tax years on his Lacerte Tax software program and informed me that he found that the credit is usable when no AMT tax liability exists.


 


Why should I assume that you are correct. Can you please provide me with some supporting tax article documentation that strengthens your position on this matter.


 

Expert:  taxmanrog replied 1 year ago.

Hi! Welcome to Just Answers! I hope that I can better clarify your situation as far as the AMT is concerned.

The entire purpose of AMT is to force all taxpayers who are considered "wealthy" in this socialistic society to pay some kind of tax. The AMT system is aimed at hitting "preference" items that the typical Joe Blue Collar won't have. Like ISO's.

The AMT that you paid should not be considered prepaid tax, because that insinuates that you are entitled to get it someday. This is not the case. Also, not all AMT Tax paid is available for credit in future years. Exclusionary items DO NOT generate creditable AMT. Deferral items do. Luckily for you, ISOs that are exercised and the stock not sold are considered deferral items.

For AMT Credits to apply, you can claim the AMT credit if you are in REGULAR tax, but only to the point of your AMT tax liability. For example, in your case, you have a $77k AMT credit that you are carrying forward. Your REGULAR tax liability is $92k. Your AMT tax liability is $82k. You would be able to use $10k of the AMT Credit carryforward. Your AMT credit cannot reduce your regular tax liability below your AMT tax liability.

Any unused AMT Credit can be carried forward. The special 4 year rule that you mentioned above only applies to AMT credits that have been carried forward for four years or more. IRC §53(e) states that if you have such long-term credits, you are allowed to claim 50% of the credit, even if it drops your tax below the AMT amount. Normally, as I said above, the AMT Credit is limited to the difference between regular tax and AMT tax. This special rule applies only to credits for taxable years beginning BEFORE January 1, 2013.

If you have any other questions, please ask away! If you have found my answer helpful, please rate me highly! I would appreciate it!

I don't know where you are in Chicago, but here in the SW Burbs, it was a beautiful day today! Enjoy tomorrow, even though it is supposed to rain!

Roger

Customer: replied 1 year ago.

Roger


 


The tax article from the internet was clear,concise and easy to understand for me.



Can I ask you, do you agree with the tax article from the internet:



"The Alternative Minimum Tax (AMT) credit lets you recoup money you had to pay as an AMT in a prior year. You can only claim this credit in a year when you don't have to pay AMT. You can't use the credit to reduce your AMT liability in the future. However, you can carry forward any unused portion of the credit to future years."


 


(yes or no)



I think the hardest part of your job is providing clear and concise answers that are communicated in a way that they can be understood by the average person especially so when the issues are very technical in nature. So I hope that you will look at my comments as a learning lesson for both of us on communicating words to each other. I am sure you are a very knowledgeable tax person; however, your answers have not always been clear and easy for me to understand. The reason I have asked the same questions so many times in different ways is because I continued to be confused over words for example:


 


1. Your last answer that "The AMT that you paid should not be considered prepaid tax, because that insinuates that you are entitled to get it someday. This is not the case."


 


1. In fact to me it is the case, it is a prepaid tax that I expect to get someday as a minimum tax credit carryover of $92000.00 against future years regular tax.



2. My question - your answer: So does that mean that the minimum tax credit is usable when I have no AMT tax just a regular income tax? No, just when you have an AMT liability.


 


 


2. Your answer appears to be just the opposite of what is true. I am able to get the AMT credit when I have a regular tax not when I have an AMT liability.


 


3. Your answer: The min tax credit will be usable in 2013 and future years to reduce your AMT to your regular tax burden, or floor. I do not know of any 50% use, three or four year use of the min tax credit as a refund, etc.


 


3. Your answer "reduce your AMT to your regular tax burden, or floor" is confusing. What does it mean? A clearer answer would have been (You can only claim this credit in a year when you don't have to pay AMT. You can't use the credit to reduce your AMT liability in the future).


 


4. My question - your answer: If I am subject to the AMT tax in future years, are you saying I will not be able to use the minimum tax credit for those years? No. That the credit will indeed be available for AMT application in future years. The problem is that now the min tax credit is only available against AMT, and no refund provision exists.



4. This answers provided confusion because it appears to be stating that the minimum tax credit is only usable in a year when an AMT tax exists that is not true.


 


5. Your comments: First, the easiest idea to grasp. The minimum tax credit is just that, a tax credit available against AMT. You can use just enough to zero out your AMT addition, since the prior year AMT paid is treated as just that, a prepayment. When the minimum tax adjustments and preferences reverse, the prepayments would theoretically be usable.


 


5. It gives a reader the impression that the AMT tax credit is only usable against AMT tax liability. When in fact you can't use the credit to reduce your AMT liability in the future.


 


6. Your answer that: For AMT Credits to apply, you can claim the AMT credit if you are in REGULAR tax, but only to the point of your AMT tax liability. For example, in your case, you have a $77k AMT credit that you are carrying forward. Your REGULAR tax liability is $92k. Your AMT tax liability is $82k. You would be able to use $10k of the AMT Credit carryforward. Your AMT credit cannot reduce your regular tax liability below your AMT tax liability.


 


6. You provided an excellent example with numbers so I was able to understood what you meant when you used the words AMT tax liability. However, the confusing words in your answer are the words AMT tax liability. If you are subject to a regular tax, you do not have an AMT tax liability. To me an AMT tax liability is something added on top of your regular tax. To me, it would have been easier to understand if in your example you used the words AMT tax liability floor amount since your regular tax exceeded your AMT tax. But since you provided an excellent example with numbers, I understood what you meant when you used the words AMT tax liability.


 


Thanks for your answer, The refundable credit under Section 53 (e) is gone after 2012: I was not aware of that change.


 


In conclusion, in your last example I believe I finally understood that you agreed with the tax article above. That is: You can only claim this credit in a year when you don't have to pay AMT. You can't use the credit to reduce your AMT liability in the future.



(Is that a yes or no?)


 


Thanks


Joe

Expert:  taxmanrog replied 1 year ago.
You are correct! You can only use the AMT credit in a year when you are not already in AMT. So I agree with the article's statement.

I am sorry if some of information was hard to understand. I teach, and tend to over explain everything. However, taxes in general, and AMT in particular, are difficult to explain in the first place! The answers that the experts provide are kept in an archive that people can look at. IT also looks like you have confused some of the statements made by the prior expert, who opted out, with what I said. I am taxmanrog, the expert who opted out was PDTax.

So, for example, your item #1 in the last post, that AMT should not be considered a prepaid tax, in your case you are correct, it is a prepaid tax. However, in many cases it is not, so for the sake of everyone who reads these discussions, I said it is not a prepaid tax because it is not always result in a credit that can be carried forward. This is my statement.

Item #2, you can only claim a credit when you are in regular tax, and only to the extent that it reduces your regular tax to the amount of AMT tax. The answer you quote is incorrect, and was from the expert who opted out. In my 4th paragraph, the one with the example, I said "you can claim the AMT credit if you are in REGULAR tax, but only to the point of your AMT tax liability". This is true. My example followed.

Item #3 is a statement made by the other expert. What I think he was trying to say is that the AMT Credit will reduce your REGULAR tax down to the AMT amount or the floor (or 100% of the credit), whichever applies. The next line where he says he is not aware of the four year rule indicates he doesn't really know about AMT, as it is clearly stated in IRC §53(e).

Item #4 is a statement made by the other expert, and is incorrect. The opposite is actually true, AMT credits can only be used in a year when AMT does not apply.

Item #5 is another statement made by the other expert, and is also incorrect. The AMT credit is not used as an adjustment, it is a credit that can offset regular tax.

Item #6 needs some explaining. I am glad that the example helped. In any year that you are in regular tax, you can still calculate what the AMT tax liability is. While you might not be subject to it, it is still calculated. You need to calculate it just to see what the AMT amount is so you can calculate the maximum AMT credit that can be utilized in any year.

Yes, in summary, you can only claim the AMT credit in a year in which you are not in AMT already.

I hope this clears things up! If you still have questions, please let me know! I would be happy to answer! If you have found my explanations and examples helpful, please remember to rate me highly! I am the second expert, the first one opted out.

Again, thanks for the question! Have a great week!
Customer: replied 1 year ago.

Roger


 


I did not realize that I was working with a second tax expert so I apologize if I charged you with confusing answers and statements that you did not make.


 


After dealing with the PDTAX expert, my confidence level was initially destroyed because of the many incorrect and confusing statements made by PDTAX. I was losing ground on this issue and continually had to ask more questions..


 


Roger, I am glad you came to the rescue. my confidence level has now been restored. The AMT and the minimum tax credit work exactly like I thought based on previous discussion with my CPA.


 


Thanks again


Joe

Expert:  taxmanrog replied 1 year ago.
Joe, it was nice to work with you! There are some experts who will jump on any question, even though they don't have knowledge of the topic. I try to pick the ones that I know and have experience with. For the few bucks that the questions pay us, I don't believe that it is worth tarnishing my reputation by spitting out bad answers! I have worked over 28 years to get the reputation that I have, and I fiercely defend it!

If you have found my answer helpful, please don't forget to rate me. That is the only way we are "graded" on this site.

I enjoyed your questions. AMT is one of those areas that most people don't know about and could care less! It is refreshing to get a decent question out here! So thank you!

Roger
taxmanrog, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 389
Experience: Licensed CPA, MA, MST with 29 year's experience. Teach Accounting and Tax courses at Masters level.
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