CASH FLOW MANAGEMENT
BUDGET
In planning your budget, it is important to allow for both immediate and long-term goals. A good strategy is to start with the future and work back to the present. In this way, provision for long term goals are built into your plan and will not be brushed aside by month to month demands on your income. The checking account and reserve balances we have recommended come into play here, as they allow for major and/or unexpected expenditures.
Once your budget is established, you should keep complete records of actual expenditures. This will enable you to make periodic comparisons between amounts budgeted and amounts expended, evaluate both your budget and your performance, and review the steady progress you are making toward your long-term goals.
ALTERNATIVE MINIMUM TAX – Credit for prior year minimum tax
The special treatment of some items of income and expenses only allows you to postpone paying tax until a later year. If, in prior years, you paid alternative minimum tax because of these tax postponement items, you may be able to claim a credit for prior year minimum tax against your current year’s regular tax. The amount of the credit cannot reduce your current year’s tax below your current year’s tentative alternative minimum tax.
You may be able to take a credit against your regular tax if you:
1) Paid alternative minimum tax in the prior year,
2) Had an unused minimum tax credit that you are carrying forward , or
3) Had un-allowed qualified electric vehicle credits in the prior year.
The AMT credit tends to even out effects of AMT over time. The AMT credit will be of no benefit for AMT arising from certain itemized deductions, certain tax-exempt interest, depletion and the exclusion for gains on the sale of certain small business stock.
AMT for ISOs
The exercise of ISO s creates a tax preference item for alternative minimum tax, increasing AMT taxable income above ordinary taxable income. If you pay AMT you are entitled to an AMT credit carryover that can be carried forward indefinitely and be used when regular tax exceeds alternative minimum tax.
Assuming no new AMT preference items, whenever your marginal regular income tax rates exceeds 28% (AMT rate), you would likely use all or part of the credit carryover. Subsequent gains on sale of long-term capital assets will not be helpful since those gains are taxed at 20%. However, potential new income (i.e. compensation), could push you into a higher tax bracket, creating higher regular tax. Excess regular tax over AMT will allow for use of AMT credit carryover.
The sale of holdings of ISO stock would also be a means to utilize the AMT credit carryover. The basis of the stock for AMT purposes includes any AMT tax paid due to the exercise. Assuming the stock is held for a one-year period, the gain on sale for ordinary income tax purposes would be a negative tax preference for AMT. Check with your CPA to see if this will allow you to use the AMT credit carryover.
When you ultimately exercise the non-qualified options, you will create ordinary income which will likely push marginal regular tax above the AMT, thereby creating a situation where you can utilize your AMT credit carryover.
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