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As part of the Tax Relief and Health Care Act of 2006 (RL. 109-432, December 20, 2006), the law now provides some benefit for previously unusable alternative minimum tax (AMT) credits, such as those created by the sale of stock acquired through the exercise of incentive stock options (ISO) for tax years beginning after December 20, 2006.
Background
The exercise of an ISO doesn't result in a regular tax liability in the year of exercise. The amount by which the stock is in the money (i.e., how much its value exceeds the exercise price) will be subject to regular tax as capital gain when the stock is ultimately sold. For AMT purposes, however, the amount that the stock is in the money represents an adjustment that increases AMT income Ui the year of exercise. For example, an employee is granted an ISO with an exercise price of $10. The price of the stock at exercise is $15. Since the stock is in the money, the employee exercises the ISO. The employee pays $10 to the company, incurs no regular tax liability on the exercise, and takes a $10 basis in the stock. For AMT purposes, the employee has an AMT income adjustment of $5 and takes a $15 basis in the stock. If the stock increases in value to $20 and the individual sells the stock, he or she will recognize $10 ($20 proceeds less $10 regular tax basis) of capital gain for regular tax purposes. The gain for AMT purposes will be $5 ($20 proceeds less $15 AMT basis). This results in a negative adjustment for AMT purposes, which potentially allows for the use of minimum tax credit.
A minimum tax credit is generated by the payment of...