Question about California's AMT v.s. Federal AMT

[peter1104]

Hello all, I'm preparing tax this year with TurboTax Premier and have to pay AMT for my federal tax due to ISO exercise. When I went to the AMT section in State Taxes (CA),  there was a question titled "Enter other incentive stock options" — If you excluded any California stock options (CQSO) proceeds from your income, enter the amount for alternative minimum tax purposes. 

This field was pre-filled with my ISO exercise information that I previously entered in the federal tax section. However, since I don't have any CQSO proceeds, I put "0" in this field instead. This change of data made me from having a large balance due for CA tax to getting a refund and not subject to CA's AMT anymore. 

This made me wonder if I can actually put 0 in this field. Maybe I misinterpret this question? Is it possible for an individual to pay a good amount of federal AMT but not CA's AMT? 

Much appreciated!

[GeorgeM777]

It may be that you need to leave the field as is, that is, re-enter the original amount.  Under CA AMT, you must treat stock acquired through the exercise of an incentive stock option as if the option were a non-statutory stock option.  You must generally include as an AMT adjustment, the difference between the fair market value of the stock on the exercise date and the option price in the year the option is exercised.

Increase your AMT basis in the stock you acquired from exercising your incentive stock option by the amount of the adjustment.  California may allow an AMT credit in a subsequent year. 

No AMT adjustment is required if you dispose of the stock in the same year you exercise the option.

@peter1104

[peter1104]

Hi @GeorgeM777, thank you for the reply! I understand I'm subject to CA's AMT and I did fill out the ISO exercise information when working on my federal tax. For this specific question in the CA tax section: "Enter other incentive stock options — If you excluded any California stock options (CQSO) proceeds from your income, enter the amount for alternative minimum tax purposes.", isn't this about ISO options other than the ones I've entered previously in the "ISO exercise and hold" survey under federal tax? Also, it looks like it's specifically targeting CQSO which has a very specific tax implication and doesn't apply to my situation. 

Could you help clarify the intention of this question a bit and if my interpretation aligns with your understanding?

[GeorgeM777]

Yes, that appears to be true.   It does not appear that your ISOs are of the type that qualify as CA qualified stock options.   Accordingly, if you go back to the page About California's Alternative Minimum Tax (AMT) you can click Skip AMT and continue through the rest of the application. 

@peter1104

[peter1104]

Thanks @GeorgeM777 for your help again! On a side note, I wonder if you or anyone here (including TurboTax employees) know where we can file bugs such as this to TurboTax. I found this to be very problematic for TurboTax Premier to populate the purchase summary of ISO reported in federal tax directly in the AMT section of CA state tax where the question was specific about other ISO and CQSO. This bug increases one's tax liability to a great extent and has serious tax implications for not only current but also future years. If the individual didn't go over this section like what I did, they wouldn't know the data was wrongly entered and ended up paying taxes that weren't theirs. 

[GeorgeM777]

Your comments and thoughts have been duly noted.  Management has already begun its review of matters of this type.  Our development team has already implemented changes for some of these matters, while others will likely be addressed at the end of the tax season.   

@peter1104

[peter1104]

Thanks again @GeorgeM777 for your reply! After checking my Form 6251 (federal AMT) and Schedule P (state AMT), I realized the line 10 of my Schedule P didn't take the "ISO exercise and hold" information I previously entered in federal tax. As a result, I'm subject to a good amount of federal AMT but getting a refund for state tax. I wonder if this is related to the bug I was reporting? Like, TurboTax for some reasons didn't register the "ISO exercise and hold" information properly in state tax and put it in the "other ISO/CQSO" field.

And it looks that line 10 of Schedule P is a combination of "incentive stock options from Schedule K-1 worksheets" and "other incentive options". Do you know what Schedule K-1 worksheets is about? I wonder if it stands for the "ISO exercise and hold" information. Thanks!

[GeorgeM777]

Just to confirm, on the page in the CA section Enter Other Incentive Stock Options, did you re-enter the ISO exercise amount that had been pre-filled?

According to the CA instructions, Line 10 of Schedule P should be the excess of:

• The fair market value (FMV) of the stock acquired through the exercise of the option (determined without regard to any lapse restriction) when your rights in the stock first become transferable, or when these rights are no longer subject to a substantial risk of forfeiture, over
• The amount you paid for the stock.

Additionally, are you using the TurboTax online version?

@peter1104

[peter1104]

Hi @GeorgeM777, yes, I changed the pre-filled data to be "0" and it changed my state AMT liability. When I changed the field back to the pre-filled data / ISO exercise amount (line 2i of Form 6251), line 10 of my Schedule P reflected that change. I think at this point I realized what the problem was. It might not be a bug per se but a very unclear question as presented in the Enter Other Incentive Stock Options: If you excluded any California stock options (CQSO) proceeds from your income, enter the amount for alternative minimum tax purposes. 

Purely based on the question itself, it's easy to think the answer should be either: any proceeds from CQSO or other ISO that wasn't previously entered in federal tax. However, it's actually about the ISO exercise information as listed in line 2i of Form 6251. 

I'm still not sure how to best interpret this question, though, and why ISO exercise information is the answer to this question. Could you help explain the intention behind this question? Thank you for your help again.

p.s. I used the downloaded version (Mac) of TurboTax Premier.

[GeorgeM777]

Here is one way of interpreting the question, which admittedly, is not an easy one to answer.  The question is asking about proceeds; however, it would also include any income that had been deferred given the special tax treatment afforded to CA Qualified Stock Options. In this regard, on the page Here's the income that California handles differently, there is a Learn More tab next to the line Income from California Qualified Stock Options.  Selecting Learn More provides the following, among other things, regarding CQSQs:

• Income from a CQSQ is deferred until the disposition of the option or the stock acquired upon exercise of the option.

Thus, had there been any proceeds, but also income, from a CQSQ that had been previously excluded, but after exercise of the CQSQ needs to be added back back in for CA AMT, then such amount needs to be entered on the page Enter Other Incentive Stock Options. 

In your case, you did have an ISO which required reporting on your CA return, and therefore, the box in question was already pre-filled. However, you did not have any CQSQ proceeds or income to add to the box in question.  Thus, you could leave the page as is.  

@peter1104

[peter1104]

Thanks @GeorgeM777 ! Is it fair to say the box in question is meant to be filled with ANY CA AMT related amounts, not only CQSO related? Like, if I happen to have CQSO proceeds, what I would need to do is to add that amount to the pre-filled amount (ISO)? Is this a correct way of thinking about the data input:

Box in question = line 2i of Form 6251 (ISO exercise and hold) + any CQSO proceeds

Thanks again.

[peter1104]

Hello @GeorgeM777, would you be able to help with my last question? Thanks! 

[GeorgeM777]

Not sure what you mean by CQSO proceeds.  Generally, yes, your federal return should reflect all ISOs exercised and held, including those that meet the definition of a CA Qualified Stock Option (CQSO).  What you are reporting then for AMT is that difference when the fair market value of the ISO is higher than its exercise price. Regarding CQSO and federal taxes, the CA Franchise Tax Board has stated:

• ...federal law treats a California qualified stock option as a non-statutory stock option. For federal tax purposes, you recognize taxable wage income upon the exercise of a California qualified stock option. You should make an adjustment to your federal adjusted gross income for the California qualified stock option wage income you included on your federal return.

Here is a link to the FTB's Equity-Based Compensation Guidelines from which the above quoted material was obtained:

Equity-Based Compensation Guidelines

@peter1104

[peter1104]

Hi @GeorgeM777, thanks for the reply. Yes, I understand what CQSO means and I'm not subject to it. However, I'm still trying to figure out what the intention of this question is (under State Taxes AMT section):

• Enter Other Incentive Stock Options
  • If you excluded any California qualified stock options (CQSO) proceeds from your income, enter the amount for alternative minimum tax purposes.

The field of this question is pre-filled with my ISO exercise information previously entered in federal tax. My question is, since I don't have CQSO proceeds but still get this pre-filled by TurboTax, does that mean this field equal to ISO exercise + CQSO proceeds?

Thanks.

[GeorgeM777]

No, I believe that box just includes your ISO exercise information which got carried over from your federal return.  I think the focus on that page is if there are any other incentive stock options that have not been already entered on your federal return, then you can add them to the amount in the box Other Incentive Stock Options.  In other words, the page is entitled Enter Other Incentive Stock Options because TurboTax already knows about the other incentive stock options that you entered on your federal return. 

@peter1104