## Avoid a high alternative minimum tax (AMT) bill by understanding how ISO exercises impact it.

Receiving incentive stock options (ISOs) has its perks. You can eventually sell them for a potentially life-changing payout. A payout that can be your ticket to financial freedom.

However, ISOs have a downside too. Depending on how you handle them, you can get hit with the dreaded alternative minimum tax (AMT) on top of the regular income tax you owe.

Needless to say, you want to avoid AMT — what taxpayer wouldn’t want to minimize their tax bill as much as possible?

But you can’t do that unless you understand how ISO exercises impact your AMT bill.

With AMT, the current market value of the stock price is the determining factor of how much you can exercise before hitting the AMT threshold. That means the lower your stock price goes, the more shares of ISOs you can buy. That’s because you make less “profit” when you exercise at a lower stock price.

What we usually advise our clients to do is exercise shares up to their AMT threshold. The goal here is to exercise enough shares that you don’t generate any additional tax from AMT.

Below, I’ll show you how to calculate your alternative minimum tax using an example with Duncan, a hypothetical tech professional who exercises his options during the year. Note that this example doesn’t include selling options or any other AMT adjustments that could be applicable.

*Disclaimer: This blog post is not to be taken as tax advice. Each individual’s situation is different and we don’t guarantee the outcome of any example presented here. This content is for educational purposes only and should not be used as a planning tool for your tax situation without consulting a tax professional. *

## 6 steps to calculate your alternative minimum tax (AMT)

### Step 1

Figure out your regular tax liability, which you can find in your tax return or on Line 16 in your Form 1040. Don’t make the mistake of using the amount paid or refunded on the last line of your tax return.

Your regular tax liability is the tax balance before any offsetting withholding or payments are applied.

Duncan’s regular tax liability is $100,000.

### Step 2

Now, it’s time to calculate your ISO AMT adjustment.

If you exercised and held any ISOs, start by calculating your bargain element.

To do so, you’ll need the following numbers:

- The fair market value of the stock on the date you exercised. For Duncan, it’s $55.
- The strike price (i.e. price paid) per ISO. For Duncan, it’s $12.

The difference between those two numbers is your bargain element. Duncan’s bargain element is $43 per share.

Also figure out the number of shares you exercised and held. For Duncan, that number is 10,000 shares.

Next, plug the above numbers into this equation:

ISO AMT adjustment = bargain element * number of shares

$43 * 10,000 = $430,000

Duncan’s ISO AMT adjustment is $430,000.

### Step 3

Figure out your AMT taxable income by adding your regular tax liability and ISO AMT adjustment together.

Regular tax liability + ISO exercise = AMT taxable income

Here’s what that equation would look like for Duncan:

$100,000 + $430,000 = $530,000

His AMT taxable income is $530,000.

### Step 4

Adjust your AMT taxable income based on your filing status — are you single or married?

If single, reduce the amount from Step 3 by $85,700.

For a single Duncan, that would be: $530,000 – $85,700 = $444,300.

If married, reduce the amount from Step 3 by $133,300.

For a married Duncan, that would be: $530,000 – $133,300 = $396,700.

Note: This amount can have a prorated reduction if your AMT taxable income exceeds a certain dollar amount.

### Step 5a

Next, calculate your alternative minimum tax.

Multiply the amount you calculated in Step 4 by 28%. If the amount you calculated in Step 4 is lower than $220,700, multiply it by 26% instead, and skip step 5b below.

Because Duncan’s Step 4 calculation is greater than $220,700, he’ll multiply it by 28%.

For a single Duncan, the calculation would look like:: $444,300 * 0.28 = $124,404.

For a married Duncan, the calculation would look like: $396,700 * 0.28 = $111,076.

### Step 5b

If Step 5b applies to you (that is, if the amount you calculated in Step 4 was lower than $220,700), you need to make one more adjustment to calculate your alternative minimum tax:

Reduce the amount you calculated in Step 5a by $4,414.

For a single Duncan, the calculation would be: $124,404 – $4,414 = $119,990.

For a married Duncan, the calculation would be: $111,076 – $4,414 = $106,662.

### Step 6

The last step to calculate your anticipated AMT is reducing the AMT you calculated in Step 5 by regular tax.

Reduce your calculation from Step 5a (or 5b, if applicable) by your regular tax liability, which is the amount you calculated in Step 1.

For a single Duncan, the calculation would be: $119,990 – $100,000 = $19,990.

For a married Duncan, the calculation would be: $106,662 – $100,000 = $6,662.

If single, Duncan’s anticipated alternative minimum tax is $19,990.

If married, Duncan’s anticipated alternative minimum tax is $6,662.

## Your alternative minimum tax (AMT) is just the start

After following the six steps above, you should have a good idea how much alternative minimum tax you owe.

But the work doesn’t end with these steps; you’ll need to consult a tax professional who can cover your tax blindspots.

Book a call today to talk to myself or another expert on our team about setting yourself up for minimal taxes and a stress-free tax season, this year and beyond.