Alternative Minimum Tax (AMT)
Unlike non-qualified options (NSOs), an incentive stock option (ISO) may be advantageous to the holder by deferring tax payments until the shares are exercised and providing tax benefits to employees who are willing to take the risk of holding onto their shares. While ISOs may be attractive to the holders, employees should be aware that ISOs are subject to Alternative Minimum Tax (AMT).
AMT is an alternative method of calculating the tax payments are due. The AMT essentially adds back various deductions and exclusions that were taken out when determining the regular tax. ISO holders should note that the spread on an incentive stock option (ISO) is subject to AMT. This may result in the taxpayer paying a higher tax than initially planned.
Please also note that the Alternative Minimum Tax grants taxpayers a Minimum Tax Credit (MTC) for the amount paid under AMT that exceeds the amount that would have been paid under normal tax rules during the year. The credit can then be applied when normal taxes exceed AMT taxes in future years.
There is software available for those planning to do an AMT calculation. If you are preparing a return by hand, you can use Form 6251. In any case, anyone that believes they may potentially be subject to an AMT should contact a tax advisor.
The table below, derived from material provided by Janet Birgenheier, Director of Client Education at Charles Schwab, shows a basic AMT calculation (As cited by the NCEO, 2016):