In the Tax Relief and Health Care Act of 2006, Congress threw a bone to alternative minimum tax (AMT) victims who’ve been granted incentive stock options (ISOs).
Strategy: Crazy as it seems, you might think about retiring to truly benefit.
Here’s why: The AMT has walloped employees of many high-tech companies that fell from grace after the employees exercised options to buy company stock. Although you may qualify for a minimum tax credit, the credit can only reduce your regular tax liability (but not your AMT liability) by the amount that regular tax exceeds your AMT liability for a particular year. So, it might be virtually worthless if you have to pay the AMT every year.
Starting in 2007, the new law allows you to use part of the credit carried forward, regardless of whether the AMT hits you. This tax break is available for a six-year period. The credit is “refundable,” meaning the IRS will give you a refund even if you haven’t paid any tax through withholding or estimated tax payments.
In other words, the lower your income, the more you can benefit from this new tax break. It might even behoove you to quit your job to create the maximum tax payoff.
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