Alternative Minimum Tax (AMT)

NOTE: please contact a professional tax advisor for assistance, or use audit-defensible tax preparation software that calculates AMT.

Incentive stock options (ISOs) are US tax-qualified options that, if correctly granted by the company, may be advantageous to the optionholder by deferring tax payments until the shares are sold and providing tax benefits to employees who are willing to hold onto their shares after exercising their options. No tax is due upon exercise, so the employer does not need to withhold or sell shares to cover taxes due. If the shares are sold after holding them for the statuary holding period of two years after the date of grant and one year after the date of exercise, long-term capital gains rates apply to the sale. To qualify as an ISO, the optionholder must be a US employee of the company, and must remain an employee to exercise the ISOs. While ISOs may be attractive to the holders, ISOs are subject to Alternative Minimum Tax (AMT).

What is AMT?

  • A US Federal tax system to ensure the IRS receives a minimum amount of tax
  • The AMT adds back various deductions and exclusions that were taken out when determining regular US Federal tax
  • Every US taxpayer must calculate both standard tax liability (IRS 1040) plus AMT liability and pay whichever is greater
  • Once thought to apply only to the highest income brackets, ISO exercises alone may trigger AMT for even middle income households
  • Fair Market Value - Exercise Price, called the spread on the ISO exercise, is subject to AMT if the shares from that exercise are not sold by December 31 of the year exercised
  • Also applies to California state taxes - they have their own AMT calculation

How do I Calculate AMT?

Preliminary AMT taxable income = Taxable income + Medical/dental deductions + State/local/real estate tax deductions + Personal exemptions + Spread on ISO exercise

Actual AMT taxable income (AMTI) = Preliminary AMT taxable income - AMT standard exemption

Tentative minimum tax = AMTI X 26% up to $191,500 plus AMTI X 28% for greater amounts of AMTI

AMT = Tentative minimum tax - Regular tax 

If AMT is higher than the regular tax, then you pay the AMT + the regular tax.

Recent AMT Developments

The Tax Cut and Jobs Act significantly increased both the AMT exemptions and the thresholds at which exemptions phase out, beginning in the 2018 tax year. This is the key that has significantly reduced the effects of ISO exercising on middle income households. We include the 2017 amounts below for comparison to the new limits:

2017 through 2019 AMT Exemption Amounts
Tax Filing Status 2017 2018 2019
Single/Head of Household $54,300 $70,300 $71,700
Married Filing Separately $42,500 $54,700 $55,850
Married Filing Jointly $84,500 $109,400 $111,700
2017 through 2019 AMT Phaseout Thresholds
Tax Filing Status 2017 2018 2019
Married Filing Jointly $160,900 $1,000,000 $1,020,600
Everyone Else $120,700 $500,000 $510,300

Anyone exercising and selling ISOs may be subject to AMT. Carta highly suggests affected optionees consult a tax advisor with equity taxation and AMT experience. While we can’t endorse a particular tax software, more than one of the popular tax preparation companies is fully capable of calculating AMT and determining whether or not additional tax is due. If preparing a return without assistance, please use Form 6251 to calculate AMT liability.

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