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?