Author Topic: ISOs Exercise and Hold Tax issue -Please help  (Read 1798 times)

bluelion

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ISOs Exercise and Hold Tax issue -Please help
« on: April 12, 2015, 10:42:11 AM »
Hello everyone,

It's been a while since we've posted something, but now we are in a major bind and we need help, so please help.

We exercised ISOs in 2012. The ISOs were at different strike prices and I will try to simply things. Let's say we exercised 3,000 ISOs with a $3 strike price and with a fair market price of $10. We did not pay regular income taxes since we didn't sell the shares that year, but we payed AMT. The AMT was paid on the spread. ($10-$3)*3000=$21,000 (AMT form 6251, line 14).  In 2014, we sold 1,000 shares (of the 3,000 total) at 9$ as we felt the stock might be going down and we should sell. Tax advisor said we shouldn't sell all of it as it is an interesting company in an emerging market.

Given this scenario, we think that we should be able to put $7,000 that was paid in 2012 as AMT { ($10-$3)*1,000shares= $7,000 }  somewhere in the AMT as we shouldn't pay AMT twice on it. Turbo Tax seems to think that we can put this under disposition of property, however it leaves it up to us to calculate how much (vaguely stated as the difference between regular basis gain or loss and AMT based gain or loss). I think this should be automated as this is extremely confusing and I would rather not pay AMT twice. I would greatly appreciate some help on this as we are not able to work with our previous advisor due to some unforeen circumstances. A lot of his clients are stranded on very short notice... It's hard trying to get in with someone else now since it's crunch time.

I'm hoping someone here with ISO experience can help. Thank you in advance!

Bicycle_B

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Re: ISOs Exercise and Hold Tax issue -Please help
« Reply #1 on: April 12, 2015, 01:25:07 PM »
I'm not experienced in taxes on stock options personally, but from what you describe, shouldn't you be receiving a loss of $1000 from sale, implying no current tax to be paid at all from the sale?

In other words, the year when you exercised the option established a basis of $10 per share because you paid tax on the shares then, based on the $10 valuation...right? 

So now that you're selling at $9, you're only responsible for tax on the difference between $10 and $9 on the shares sold:  1,000 shares x $1 loss = $1,000 loss.  (You don't pay tax on a loss, you just have the option of netting it against other gains, or using it to reduce ordinary ordinary income, if I understand correctly).

Just one person's thought.  Not a tax expert, curious to see better responses.

seattlecyclone

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Re: ISOs Exercise and Hold Tax issue -Please help
« Reply #2 on: April 12, 2015, 04:26:31 PM »
I have experience with this exact scenario. It is complicated. Sorry about that.

When dealing with ISOs and the AMT, you basically have to fill out Schedule D twice: once for the regular tax and once for the AMT. The reason is that for the purpose of the regular tax, your cost basis is $3/share, and for the purpose of the AMT your cost basis is $10/share. This means that when you sold your shares for $9, you realized a long-term gain of $6/share for the regular tax but you realized a long-term loss of $1/share on the AMT. You don't need to file the AMT version of your Schedule D, but you do need to fill it out for your calculations.

The difference in capital gains/losses between the two Schedules D is reported on Line 17 of Form 6251 (disposition of property). The $3,000 capital loss limitation does apply to your AMT losses. Since you only sold 1,000 shares of your ISOs, the loss from these is only $1,000, but you may run into the limit if you realized any other losses on other stock sales throughout the year.

Once you have figured out your overall capital gain or loss for AMT purposes (applying the loss limitations, if applicable), subtract your regular tax capital gains from your AMT capital gains. Enter the result (probably $-7,000 unless the capital loss limitations came into effect) on Line 17 of Form 6251. You'll also need to use the adjusted capital gains amounts in Part III of your Form 6251 when calculating your AMT with capital gains rates included.

Does this answer your question about how to calculate things?

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Now, going beyond your original question, one thing you may not be aware of is that you can possibly get all of the AMT you paid when exercising ISO shares refunded to you eventually. The tax law distinguishes between "exclusion items" (things that are completely excluded from your income on the regular tax but not for the AMT) versus "deferral items" (things that you have to include in your income under both tax systems eventually, but are recognized earlier for the AMT). ISO exercises are included in this latter category.

To claim this credit, you need to file Form 8801 for the tax year after you exercised your options (2012 in this case). You go through a bunch of calculations to determine what fraction of your AMT was due to the deferral items, and you get to claim this amount as a tax credit. You can only claim this credit in a year where you don't owe AMT, and the amount is limited to the difference between your regular income tax and your tentative minimum tax. Any remaining credit can be carried over to future years.

As an example, suppose in 2011 you have $21,000 of extra AMT income, which causes you to owe $6,000 of AMT. You file Form 8801 with your 2012 tax return, showing that the entire $6,000 was due to deferral items. You didn't actually owe AMT that year, but you almost did. Your regular tax was only $1,000 higher than your tentative minimum tax. You could claim a $1,000 tax credit on your 2012 taxes, leaving $5,000 to carry over to the next year. In 2013, you're still pretty close to AMT territory, but you get to claim another $500 credit, leaving $4,500 to carry over to the next year. In 2014 you sold some of your stock, so your AMT income was quite a bit lower than your regular income. You can claim the entire $4,500 and you're now out of credit to claim.

You should check your previous tax records to see if you filed Form 8801 in 2012 and 2013. If not, you might want to amend your tax returns in those years to create a record of the carried-forward credit so you can claim it in future years when you no longer owe AMT.

bluelion

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Re: ISOs Exercise and Hold Tax issue -Please help
« Reply #3 on: April 12, 2015, 09:56:42 PM »
Thank you for the detailed information on how to calculate AMT and ISOs. I will try to do it, worst case scenario, I will probably do estimated taxes and go to a tax advisor once crunch time is over.