Can I ever get out of AMT hell (after a tax-naive ISO exercise)

Question

Is there an easy way to understand the ramifications of AMT for ISOs?

After the stock bubble burst, I was left with an AMT tax which was far greater than my entire income due to my exercise of an ISO stock option. I had to empty my bank account and remortgage my house just to pay taxes on money that I never made (and never will make) due to my lapse of understanding of the horrors of the AMT for ordinary people. Trust me, if a five-foot-two inch petite lady ever goes postal in Congress, you can look me up! My problem is I still don't understand how to get OUT of the AMT calculation horror. I still own the (nearly worthless now) shares of that ISO that kicked me into the horrors of the AMT. Yet, every year since, I've had to fill out a miriad of alternate tax forms. Basically, because of the horrors of Congress' Alternative Minimum Tax system, I have to repeat the horrors of the regular tax system, twice, and with wholly different rules. For example, I have to fill out form 8582 passive activity loss limits twice, once with regular calculations, the other with AMT calculations. Same with the CA3801. Twice. Same with 8801 AMT prior year calculations. Twice. And the list goes on. Everything seems to turn topsy turvy with the Alternative Minimum Tax system - for example, a 29.5 year depreciation turns into a 40-year depreciation. The question I'm leading up to, in exhausted exasperation, is whether or not there is a way to UNDERSTAND the AMT such that I can figure out how to (finally) get out of it given that the single item that kicked me into the huge AMT (more than my income) tax was a naive exercise of an ISO stock option. That stock is now nearly worthless so I've paid far more in AMT taxes than the stock is currently worth. I ask in almost complete exasperation ...

Is there an easy way to describe how I can get out of this AMT tax calculation hell?

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Rich Carreiro · Accepted Answer

No.  1/2 :-)I can't help you there, but given what you've said youshould absolutely read:     then find a tax preparer who understands it.

Susan Grossman · Answer

Oh my! I just read about your suggested 2007 AMT relief page

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I read it. I didn't fully understand it. Worse, I don't know if I've already screwed up again by selling in 2006 all those (nearly worthless) ISO shares that kicked me into the AMT in the first place. Basically I was trying to get OUT of the AMT by getting rid of the stocks that put me into the AMT. Ironically, I'll have to pay a long-term capital gains tax on my selling of these ISOs even though I've already paid an AMT tax far greater than the ISO can even sell for because I exercised the ISOs for a few dollars when the stock was "worth" almost a hundred dollars. Now that stock has tanked to the single digits. So, in the "regular" tax system, I've made a profit of a few dollars a share - but in the "alternative" tax system, I've paid ten in taxes, more than ten times what I sold the stock for in 2006. I sold only to get out of the AMT hell. Now, after reading your suggested article on the AMT tax credit changes, I'm worried that I did exactly the wrong thing in 2006. I will send your URL to my accountant immediately and ask if there is anything I can do in the 2006 tax year to still qualify. Thank you for your astute advice. I wish I had asked sooner. Sue

joetaxpayer · Answer

snipforbes just had an article on this; the above link will be invalid, but usually goodfor a couple weeks)JOE

Susan Grossman · Answer

Oh my. After reading the suggested Forbes article, and the awfully mean tax article

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realized that I'm subject to the AMT credit limitationskicking in at $156,400 but, being ignorant of this new law,I sold in 2007 much of the nearly worthless ISOs that kickedme into the AMT in the first place. The bitter irony of all this is that in the alternative tax system, I paid roughly fifty dollars a share in taxes alone yet in the regular tax system, I actually made a profit of about five dollars a share. So, in the regular tax system, I STILL OWE MORE TAXES on the money that, this time at least, I actually made .... but in the alternative tax system, I already paid far more in alternative taxes than the stock was worth. Problem is that the fifty dollars a share in taxes was really not ONLY from the ISO exercise but was also from my high California income tax, my high California schedule E depreciation, my high California second mortgage, and even my six kids' deduction (now some are out of the nest but the AMT tax hell hit me five years ago when they were all on my

1040). I tried the online alternative minimum tax tool but got confused when it didn't ask for the other tax timing items.

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4802). SO, my question is how do I separate the alternative tax paid for just the ISOs from the alternative minimum tax paid for the other tax preference items which also kick us into the AMT? And, then, what about California?

Can I ever get out of AMT hell (after a tax-naive ISO exercise)

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