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Alternative minimum tax (AMT) is a tax calculation that’s made for every federal tax return. However, you only pay the AMT when it’s higher than your regular tax payment. A common reason busy professionals end up paying AMT is when they exercise and hold incentive stock options (ISOs), which in AMT terms, are a deferral item. That means taxes that normally would’ve been deferred until the sale of your shares are now paid at the time of exercise.

With deferral items like ISOs come the availability of minimum tax credit (MTC), a recognition of the tax you’ve already paid in the form of the AMT. You can use the MTC in future years to lower your federal tax from the regular tax calculation, down to the AMT calculation. With the complexities of minimum tax credit, it’s important to track both the MTC you generate in the year you exercise and hold, along with the MTC that’s carried forward to future years. When you pay the alternative minimum tax, tracking the dual cost basis on shares from ISOs is also important. Another key piece of advice is to adjust your income in future years to avoid needlessly paying double the tax you actually owe.

Investors often make mistakes with their minimum tax credit, including forgetting they even have it. Overpaying the tax is another mistake that usually happens after individuals forget to adjust their income and improperly report cost bases. To avoid making costly mistakes, focus on being tax aware. Start by avoiding alternative minimum tax on your ISO exercise, if possible. Also understand the MTC and look for ways to accelerate your recognition of it in future years.