AMT/ISO question

(1) On Schedule D use $1, so you have a gain of $25 per share minus commissions. For AMT the cost basis is $16 a share, so I think line 17 Disposition of property (difference between AMT and regular tax gain or loss) should be -$15 per share.

(2) This is the subject of form

And that negative difference shows up on Form 6251 as a negative preference item -- that is, it lowers Alt Min Income which probably lowers or eliminates altmin tax.

One of the things the 8801 does for you is calculates how much of prior year AMT was due to income shifting - year to year -- and not due to high AGI or Schedule A tax deduction disallowances -- and does a nice job of calculating the credit.

AMT credit only comes from AMT due to income shifting from year to year.

What is the meaning of income shifting?

My term, but based on AMT rules.

Income shifting due to AMT rules causes you to have, for example, more income in the current year and less in future years.

ISO exercise causes you to recognize Alt Min Income of the ISO Bargain Element in the year of exercise. In a future year that bargain element adds to your basis when you dispose of the stock acquired via ISO exercise. So you have shifted income from future years into current year.

SImilarly, when you calculate depreciation expense, AMT rules require you to expense less $$$ under AMT rules than under ordinary rules, but eventually you may recover the entire cost of the depreciable property, but it takes longer to do so.

(E.g., a 27.5 year depreciation period might become 40 years under AMT rules, and a 200% declining banance calculation is 150 under AMT. So you shift AMT income into the current year even though you may eventually recognize the entire depreciation expense.)

On the other hand, non-income-shifing items, such as disallowed Sch A state taxes do not let you shift income to another year, but disallow that deduction for AMT.

OK, makes sense. So are you saying that in the year he exercised the options, that form 8801 should be filled out to calculate the AMT credit for the following year. Or is that the following year he will fill out form 8801 to calculate the AMT credit that year based on the 6251 from the previous year.

If in the following year he is not in AMT, then will an AMT credit even be allowed.

File an 8801 each year you paid AMT due to income shifting and afterwards, until all used up.

So is the basis reported on schedule D $1 or $16?

You will have two Schedules D. One is for regular income tax and one is for AMT. Write "AMT" prominently on the top of the AMT Schedule D.

Use $1 basis for regular income tax and 16 for the AMT Sch D.

The difference between the two capital gains calculations gets entered onto form 6251 as the capital gains preference item, and should lower Alt Min Income.