Many clients currently hold previously exercised Incentive Stock Option (ISO) shares. The exercise of the options behind these shares may have caused your client to pay alternative minimum tax in a prior year. In most cases, this will lead to the client having a minimum tax credit carryforward at the inception of your option planning. In addition, due to the recent stock market difficulties, your client may also have a capital loss carryforward that could be utilized.

Described below are instructions on how to efficiently utilize StockOpter® to take advantage of those carryforwards for your client.

Utilizing the Minimum Tax Credit Carryforward

If your client has a minimum tax credit carryforward (MTC), it can be utilized to the extent that their regular income tax liability exceeds their tentative minimum tax (TMT) liability. If that difference is not great enough to fully utilize the MTC, then there are two ways to increase the difference. The first is to increase the client’s ordinary income. This would cause their regular income tax to grow at a faster rate than their TMT, thus increasing the spread. However, using this method will cause the current net tax burden to increase substantially overall, which may not be the best result for the client. The second method is to sell ISO shares that have met the holding periods for tax preferential treatment. Since ISO shares generally have a higher AMT cost basis than regular tax cost basis, this could lead to a rapid increase in the necessary spread for MTC utilization without a substantial increase in the overall tax burden. The steps below describe how to quickly figure out how many ISO shares need to be sold to utilize the MTC.

1. Utilize a very simple formula to calculate the current difference between regular income tax and TMT. This formula can be entered in the cell just below the regular income tax. If regular tax is computed in cell C50 and TMT is in cell C67, then you would enter a formula in cell C51 the reads =C50-C67.
2. If the result of this calculation is less than the clients MTC, then use goal seek to figure out how many ISO shares need to be sold to increase the spread to the amount of your MTC.
3. Check the resulting sale strategy to verify that more shares were not sold out of that lot than were held. If so, sell all shares in that lot and go to the next available lot and re-do the goal seek.

Keep in mind that AMT capital losses are restricted like regular capital losses. Therefore, beware that if the ISO shares that you are selling have depreciated substantially from when they were exercised, the client may have a substantial built-in AMT capital loss. This could limit the amount of MTC that can be utilized.

Utilizing Capital Loss Carryforwards

If the client has substantial capital loss carryforwards from a prior year but is holding company shares with built-in capital gains, StockOpter® will efficiently help you determine how many shares they need to sell to utilize the capital loss carryforward. The effect of this of course is the ability to liquidate shares with no additional tax burden other than the utilization of the capital loss carryforward. The steps below describe how to quickly figure out how many shares need to be sold to utilize the capital loss carryforward.

1. Select the cell in which the Net long-term capital gain (loss) is calculated.
2. Select goal seek and set the value in that cell to –2999 by changing the number of shares to sell out of the desired capital gain lot.
3. Check the resulting sale strategy to verify that more shares were not sold out of that lot than were held. If so, sell all shares in that lot and go to the next available lot and re-do the goal seek.

Return to StockOpter® Tips