AMT and Equity Compensation
Alternative minimum tax, nonqualified stock options, incentive stock options and other forms of equity compensation.
Tax Reform
Posted by: jlehrer, September 29, 2017 04:23PM
The Unified Framework for Fixing Our Broken Tax Code found here...

[www.finance.senate.gov]

... says, with regards to AMT:

"The nonpartisan Joint Committee on Taxation (JCT) and the Internal Revenue Service (IRS) Taxpayer Advocate have both recommended repealing the AMT because it no longer serves its intended purpose and creates significant complexity. This framework substantially simplifies the tax code by repealing the existing individual AMT, which requires taxpayers to do their taxes twice."

I'm curious how they intend to handle carryforward AMT credits. Has anyone heard this discussed in the news or at a professional level?

Re: Tax Reform
Posted by: kslcpa, October 25, 2017 12:44PM
jlehrer - great question. We have been worried about that here as well.
If there's no AMT, how will the use of the credit carryforward be calculated? I don't think it's out of the realm of possibility for the credit carryforward to be totally eliminated.
Client paid $35K AMT on the exercise of ISO in 2016.(Market value $130K, purchase price $30K, AMT rate 35% because income was in the phase out of AMT exemption range).
We're now thinking, have client sell stock in 2017 for $130K after 1 year holding period (employer would probably be willing to buy it) and pay 25% federal and state income taxes in 2017. He would also get a 35% AMT credit. He can then buy the stock back from employer.
The end result is that client is $10K ahead, and has a higher basis in he stock.
It wouldn't matter what the new tax law says about AMT credit carrryforwards.
But, there must be something I'm not thinking of?
Any ideas?

Re: Tax Reform
Posted by: jlehrer, October 26, 2017 01:41PM
That's an interesting question. Why wouldn't one sell ISO shares(*) the minute they satisfied the required holding period, then immediately buy them right back?

I think the answer is because it doesn't make a difference, assuming you expect AMT not to be repealed. If you don't sell/buy, then you own shares with a low cost basis, and you have a large AMT credit. If you do use this strategy, then you own shares with a higher cost basis and have a smaller AMT credit. It's a wash.

So, if you aren't expecting the AMT credit to go away, then there's no reason to use this strategy. But, if you are expecting the AMT credit to go away, this is a way to increase your cost basis "for free".

I will definitely keep this in mind. If I hear that the AMT credit is being eliminated then I will likely recommend people exercise enough shares to consume their credits.

-J

(*) ISO shares = shares acquired via exercising incentive stock options

Re: Tax Reform
Posted by: kslcpa, October 26, 2017 09:00PM
Thanks for your feedback jlehrer.

Re: Tax Reform
Posted by: Kaye Thomas, October 29, 2017 09:05PM
I've seen many proposals to repeal AMT over the years and they all failed because of the huge revenue loss to the federal government. There are always other items that are higher priority, whether it is lower brackets or estate tax repeal. Of course, this is the first time the idea has been floated while we have a president who pays (or at least has paid) millions of dollars in AMT, so maybe this time is different. If I had to bet, though, I would bet AMT survives again. That's not a prediction, but let's say a 60-40 bet.

None of the AMT repeal efforts got far enough to where we learned what would happen to AMT credit. I don't know if the question is even on anyone's radar. Maybe there's a staffer who has thought about it and has something ready to go, but we have no way of knowing. They could simply leave the credit, so people claim it to the extent of regular income tax. But that increases the amount of revenue loss from AMT repeal, which is already pretty big to swallow, so they might just take the credit away. That would be bad, because the function of the credit is to protect people from paying tax on the same income twice. Without the credit, some people will be double taxed on the same ISO income: AMT in the year of exercise and regular income tax in the year of sale.

Kaye Thomas
Fairmark.com

Re: Tax Reform
Posted by: ruth, November 3, 2017 02:21AM
Under HR 1, the AMT credit would be limited to the regular tax reduced by other credits. A portion of the credit for years 2018 -2021 would be refundable and 100% of any remaining credit would be claimed as a refundable credit in 2022.

Re: Tax Reform
Posted by: jlehrer, November 3, 2017 02:54AM
Thanks. Here is the relevant title. I can't say I understand this at all. Sounds like an excellent article for Kaye to write!

[www.congress.gov]


Re: Tax Reform
Posted by: kslcpa, November 3, 2017 11:52AM
Pretty hefty revenue loss - $695 billion.

Re: Tax Reform
Posted by: ruth, November 10, 2017 02:18AM
The credit under the Senate bill is the same as under the Hose bill except all unused credits can be claimed by 2021 rather than by 2022.



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