September 2, 2008 12:00 am

IRS Suspends Collections of AMT Liabilities Related to ISOs

Taxpayers may be subject to the alternative minimum tax (AMT) when they exercise incentive stock options (ISOs). The reason: The spread between the fair market value of the stock at the time it is acquired through the exercise of the options and the amount paid for the stock (including any cost for the ISOs) is an adjustment for AMT purposes, which can create or increase AMT liability. Congress has promised to pass legislation that would abate all interest and penalties attributable to AMT liabilities resulting from ISOs. The legislation would also allow taxpayers to use the full amount of future refundable credits toward the entire amount of current ISO AMT liabilities. (Currently, affected taxpayers have to pay AMT now even though they have not sold the stock and do not have any actualized income from the ISO transaction.)

In view of this pending legislation, the IRS commissioner, Douglas Shulman, has agreed to suspend collections through the end of the government’s fiscal year (ending September 30). If Congress does not act by that date, the IRS will resume collections.

Source: H.R. 3861

Tax Glossary

Depreciation recapture

An amount of gain on the sale of certain depreciable property that is treated as ordinary income in the case of personal property. Recapture is computed on Form 4797.

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