On October 3, 2008, the Emergency Economic Stabilization Act of 2008 was enacted providing relief to many taxpayers who incurred alternative minimum tax liabilities due to the exercise of incentive stock options. For regular tax purposes, the exercise of an ISO is generally tax-free, provided certain holding requirements are satisfied. For purposes of calculating AMT, however, the excess of the fair market value of the stock on the ISO exercise date over the exercise price is income and is reflected in the AMT calculation. Generally, AMT liability attributable to certain items (including the exercise of an ISO) will generate a minimum tax credit that can be used against the regular tax in later years. Prior legislation allowed taxpayers with long-term unused minimum tax credits, that is, unused minimum tax credits attributable to AMT liabilities for taxable years ending before the third taxable year prior to the current taxable year, to receive a minimum tax credit that is refundable if not otherwise allowable in reducing current tax liability. This credit equaled at least 20% of the long-term unused minimum tax credits. The credit was subject to phase out based on adjusted gross income. Prior legislation did not provide relief from AMT liability resulting from the exercise of an ISO or from related interest and penalties, however.
The Act provides several changes to help taxpayers with ISO AMT liabilities. First, the Act requires the abatement of any tax liability attributable to the requirement to include amounts in alternative minimum taxable income due to the exercise of the ISO for taxable years ending prior to January 1, 2008, as well as related penalties and interest, to the extent that the liability remains unpaid as of October 3, 2008. Second, the Act accelerates the allowance of the long-term unused minimum tax credit allowing 50% of such amount to be used to reduce the tax liability or to create an overpayment for the tax years beginning before 2013. Third, the Act allows taxpayers a minimum tax credit for the 2008 and 2009 tax years that is refundable if not otherwise allowable in reducing current tax liability, equal to 50% or more of the related interest and penalties paid by the taxpayer prior to October 3, 2008, attributable to the exercise of incentive stock options. Thus, provided that an ISO AMT liability has resulted in a long-term unused minimum tax credit, the taxpayer may claim a total credit of 100% of the tax, penalties, and interest paid prior to October 3, 2008, attributable to the exercise of incentive stock options that resulted in those liabilities, over a two-year period.
The IRS has identified taxpayers affected by this recent legislation and generally is not collecting on these accounts, pending recalculation of the taxpayers’ liabilities and abatement of appropriate amounts. Taxpayers with ISO AMT liabilities that were unpaid as of October 3, 2008, can expect notification of abatement of the unpaid ISO AMT liability. Taxpayers who believe that they have an unpaid ISO AMT liability, but have not received notification from the IRS regarding this liability by December 31, 2008, should contact the IRS.
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