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Consider the following scenario:

  • In 2020, Alice vests and exercises ISOs at $1 strike price, $3 FMV. Under California AMT, she generates $2/share of gain. Alice exercises enough shares to owe a significant amount of AMT on her California taxes.
  • In 2021, Alice's company goes public. She sells everything for $10/share.

Now it is time to do taxes for 2021.

  • In her federal taxes, she uses a gain of $10 - $1 = $9/share for computing regular taxes, and $10 - $3 = $7/share for computing AMT. There is no double taxation because her regular taxes and AMT use different cost bases. It is likely that she can apply an AMT carryforward credit.
  • California computes her regular tax and AMT both based on the federal AGI (source). The federal AGI uses the $9/share gain. That causes the California AMT computation to use a gain of $9/share. The lower cost basis increases her California AMT.

When considering the marginal shares for which Alice had paid California AMT in 2020, has she been double taxed?

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  • Where does it say that California uses federal AGI for calculating AMT? It references it on line 18 of Schedule P, but that's just the itemized deductions limitation.
    – Craig W
    Apr 7, 2022 at 18:02
  • This is from Schedule P, line 15, which says to enter the taxable income from 540, line 19. The primary input to that value is the federal AGI with California adjustments. Btw, I've found my error and will self-answer in a moment.
    – Kevin Chen
    Apr 8, 2022 at 5:21

1 Answer 1

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From the 540 Schedule P instructions:

Line 9 – Adjusted gain or loss

You will have an entry on this line only if you reported a gain or loss on California Schedule D (540), California Capital Gain or Loss Adjustment, or Schedule D-1, federal Schedule D, federal Form 4797, or federal Form 4684, Casualties and Theft, for income producing property that has a different basis for AMT than for regular tax. Generally, if you reported a gain or loss from the sale or exchange of mutual funds, stocks, or bonds, you will not have an entry on this line.

To figure the amount to enter on this line:

Step 1 – Refigure the adjusted basis of the asset sold. Take into account any AMT adjustments you made this year or in previous years for depreciation, incentive stock options, circulation expenditures, pollution control facilities, research and experimental expenditures, and mining costs.

Step 2 – Refigure your gain or loss using the adjusted basis from Step 1.

Step 3 – Figure the difference between the AMT gain or loss and the regular tax gain or loss and enter the result on line 9. Enter the difference as a negative amount if: the AMT gain is less than the regular tax gain; the AMT loss is more than the regular tax loss; or you have an AMT loss and a regular tax gain.

To summarize the instructions, Alice should enter the difference in cost basis as a negative number. In her case this is $2 * number of shares sold.

The value on line 9 will reduce the Alternative Minimum Taxable Income (AMTI) after it flows through lines 14 and 19 on the same form. She will not be double taxed under California AMT.

TurboTax note: As of April 7, 2022, TurboTax doesn't handle this situation. Even if it correctly adjusts the cost basis used to compute federal AMT, it will not do so for California AMT. In fact, line 9 can't be accessed through EasyStep. It must be entered in the Forms view (View > Go To Forms).

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