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Date:   Fri, 2 Jul 1999
From:   Wendy

Question:

Hello, I have a question about AMT as it applies to ISOs. I see everywhere that there is an exemption of $33,750 for single persons in regard to AMT. Does this mean that if your ordinary income plus the gain you incur at time of option exercise must be below $33,750 in order to be exempt from AMT? Or does it mean that only the gain you incur at time of option exercise must be below $33,750?

For example, I make $60,000 a year. If I exercise 1,000 share of my ISOs at $1.00 when the fair market value of the stock is $31.00, my capital gain is $30,000. Since that amount is below $33,750 am I exempt from AMT?

Thanks for your help!

Answer

Date: Wed, 28 Jul 1999

Hello Wendy,

Sorry it took so long for me to write back to you.

The AMT exemption applies to your alternative minimum taxable income.

To clarify your example, assuming you do not sell your stock, you will have a $30,000 preference for your ISO exercise, which will be added to your taxable income, together with other AMT adjustments, to determine your alternative minimum taxable income. You will subtract your AMT exemption from that amount to determine the amount subject to the alternative minimum tax.

In your case, your tentative alternative minimum tax will probably be less than your regular tax, resulting in no AMT.

See the IRS Form 6251 and instructions. You can get them at the IRS web site, which is listed on our links page.

Good luck!

Mike Gray

Answer Revision

Date:   Wed, 28 Jul 1999

Hello Wendy,

I hope you went ahead with the exercise that I suggested to you to compute your AMT using IRS Form 6251.

One of our readers, John, wrote to me to point out you probably are subject to AMT.

When I computed your figures using only the standard deduction, $60,000 of wages, an AMT ISO preference of $30,000 and filing as a single person, you would have a federal AMT of about $3,139.

The reason the AMT applies is the first $25,750 of taxable income is taxed at a 15% rate versus the 26% "flat rate" for AMT. Under some other circumstances, such as if you have a large residential mortgage interest deduction, the AMT might not apply.

Sometimes giving "off the cuff" answers doesn't work out, but my intention was to encourage you to make the computation yourself using all of your facts, which I don't have.

I apologize for any inconvenience to you or confusion for our readers.

Mike Gray

For more information about incentive stock options, request our free report, Incentive Stock Options - Executive Tax and Financial Planning Strategies.

IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this answer was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.