Alt min tax adjustment for stock option excercised>

Of course. If you exercise ISOs, the difference between FMV of the stock at time of exercise less the exercise price is the Bargain Element (BE).

If you do not disqualify those shares by selling them too early, for example by selling them before a year and a day have elapsed since exercise date, you get to apply ISO L-T capital gains treatment for AMT. (Which is the same treatment as for regular income tax.)

By holding the shares acquired through ISO exercise into the next year, you do not recognize ISO BE income for regular income tax but do get to add the BE to form 6251 where it might generate AMT.

If you disqualify the same calendar year, you do not add the BE to form 6251. But the BE gets added to your W-2 wages and could raise income enough to produce AMT anyway.

When you sell the shares acquired through ISO exercise, and not disqualified the year of exercise, you have a capital gain or loss.

The gain or loss is the difference between sales price less adjusted cost basis of the stock and ios reported on Schedule D.

But cost basis of the stock is different for regular income tax than for AMT.

For regular income tax, basis is exercise price of the ISO. But for AMT, basis is exercise price plus bargain element.

So you need two Schedules D, one for regular income tax and one for AMT.

When filing form 6251 to calculate AMT, the difference between the Schedule D for AMT less the Schedule D for regular income tax is a reserved line on Form 6251. That amount will be negative, so reduces potential AMT.

Said.

Excellent explanation, I think.

Let me see if I understand it.

If you do NOT cash the ISOs in the year you receive them, then the income is included in AMT, and added to the AMT basis of the stock. Then when you do sell them, your AMT gain is less then your regular tax capital gain, because your AMT basis is higher.

As I understand what you explained to me then - that situation would NOT arise if the options were exercised and cashed in the year they were acquired - no AMT adjustment, no AMT difference, no AMT effect. So he would NOT get a negative AMT adjustment if he excersized and cashed the options the same year.

Does it matter when the options were first granted?

Yes. And because your AMT capital gain is less than the your regular tax capital gain, that will allow you to use more of the AMT credit generated by paying "deferral" AMT in when you exercised the ISOs.

Correct. If the ISO is exercised and the stock disposed of in the same calendar year it is essentially treated as a NQSO (without any payroll tax liability, though, IIRC).

Generally, no.

In order not to have a disqualifying disposition the exercise date must be at least a year since grant date, but generally speaking, companies will not permit earlier exercise.

It could affect state tax. Evidently in CA the key date is when options vested. If since the vesting date you moved to another state, then part of gain is CA gain, and the other is a gain in the state where you live. I think there is a publication about this. But in other states the key date could be when the options were granted.