If you have been granted Investment Stock Options (ISO’s), you may be subject to Alternative Minimum Tax (AMT) once you exercise your options. AMT depends on many factors including when you sell your ISO shares. Read here to find out more.
Alternative Minimum Tax:
Alternative Minimum Tax (AMT) is an alternative way of calculating your tax obligation and is designed to ensure everyone, especially high earners, pays an appropriate amount of income tax. Taxpayers who earn above a certain threshold must calculate their ordinary income tax and alternative minimum tax and pay the higher of the two. This tends to be the AMT because it does not allow as many preferential deductions or other tax breaks. If you have a high income, are married, have more than three children, live in a state with a high-income tax or have recently exercised ISO’s (Incentive Stock Options) and did not sell them, you may be more likely to have to pay the alternative minimum tax. If you exercise your ISO’s and do not sell them in the same year, the difference between the price you paid for the options and their value at the time that you exercised is counted as income when calculating your AMT. Conversely, if you do sell your ISO shares in the same year that you exercised your options, the spread counts as regular income rather than AMT income., However, in that scenario, you will not qualify for ISO’s favorable tax treatment which requires you to hold them for at least a year after the exercise date.
Your company may allow early exercising for ISO’s. If this is the case, you could exercise your ISO’s right when you are granted them and file an 83(b) election within thirty days. This filing will trigger the capability to be taxed on the day of exercise rather than when your shares vest. By exercising ISO’s as soon as they are granted there most likely will not be a spread significant enough to add to your alternative minimum taxable income (AMTI), however, you are paying for shares which may decrease in value in the future.
While a tax software or tax professional is recommended, if you would like to manually calculate your AMT, you must first define your alternative minimum taxable income (AMTI). This includes your regular income, preference items such as the spread on your ISO(s), personal exemptions, deductions for state and local laws and other items you usually subtract for regular tax purposes. From there, to calculate your total AMT you need to use your income, filing status, strike price, current full market value of your shares and how many options you exercised and or are thinking of exercising.
Comparable to standard deductions under the regular tax system, unmarried individuals can exempt $73,600 from their AMTI, while married partners filing jointly can exempt $114,600. These exemptions begin to phase out once your AMTI exceeds a certain threshold. For unmarried individuals that threshold is $523,600, or, $1,047,200 for married partners filing jointly. For every $1 dollar you exceed these thresholds, the exemption is reduced by $0.25. If your AMT income is four times the exemption amount, plus this threshold, you are no longer eligible for an exemption. Married partners filing separately with an AMTI up to $98,950 receive a 26% AMT tax rate. Above that, they receive a 28% AMT tax rate. All other filers with an AMTI up to $197,900 receive a 26% AMT tax rate, or, above that amount, a 28% AMT tax rate. If your final taxed AMT is higher than your ordinary income tax, you must pay the AMT. To minimize your AMT obligation, speak to a tax advisor. They may suggest strategies such as lowering your adjusted gross income, increasing charitable donations or maxing out contributions to your retirement accounts.
Disclosures
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