Incentive Stock Options: Alternative Minimum Tax Explained!
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- เผยแพร่เมื่อ 26 ส.ค. 2024
- If you have Incentive Stock Options (ISOs), then you also have to think about the Alternative Minimum Tax (AMT). Otherwise, you may be in for a surprise when you file your taxes!
What is AMT, and why does it even exist?
Why is it relevant to me as a holder of ISOs?
Explaining the ISO Bargain Element and how it fits into the AMT formula
How to exercise ISOs without triggering AMT
What is the AMT Credit?
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Well explained. I am taking Federal Taxes for this semester and the book is very confusing. It is how the book explains the math. You broke it down well. Thank you.
very helpful. I was wondering why I didn't get all my previous years AMT back as credit this year, now I know why.
That was a great explanation, so much clearer than the IRS pub. Thank you for clarifying this subject.
Your explanation was so helpful as I prepare for my CFP exam. Thank you.
Glad it was helpful, Marcus. Good luck on the exam!
@@JavaWealth thank you!
clear and straight to the point! Thank you!
Great explanation. None of the articles I read were visually clear.
It's an abomination that we've allowed the tax code to get to this ridiculous point.
Whoooph! That's tough!
I'm studying for my CFP and this video is saving me!
In the case of ISOs, this is pretty much a tax on unrealized capital gains. Very difficult situation for people who have highly appreciated ISOs, with relatively little cash balance which is a common case in tech. EX: millions in options with less than 100k cash. Which leaves the taxpayer with the only option to sell more to cover the taxes, which creates a waterfall of capital gains tax events.
yup, this is what happened to me, worst case. I exercised ISOs at the height of the market, held (foolishly) with a single minded goal of gains (hah, what gains) being taxed at long term rates, then was forced to sell everything at the bottom of the market in order to pay the AMT.
Great video! You said “choose to exercise a certain amount of ISOs to stay under AMT”. Aren’t you required to exercise a certain amount? Or can you pick and choose when to exercise and how much to exercise. Thanks
You can generally choose when & how much to exercise, which is great & can dial in to optimize your tax strategy. It's possible you are restricted from exercising during company blackout periods, but I've also seen where you are still able to exercise ISOs during them. I've not encountered a company that restricts how many you can exercise. Glad you liked the video & I appreciate the question!
Thank you. How to report it on the tax form?
Excellent explanation thank you for the video
Super helpful video! Thank you!
love this!
Good job
thanks!
You're welcome! I just watched your Dads in Business welcome video, best of luck w/ that endeavor!
This is very helpful! Can you please comment about what happens regarding basis for both regular and amt on the exercised shares?
Glad you found it useful!
Your regular cost basis is determined by the strike price. Your AMT cost basis uses the FMV at exercise + there is an additional adjustment made in the AMT calc (Form 6251, line 2k) when you sell your ISOs.
I explain how ISOs are taxed in a little more detail in this video: th-cam.com/video/wP2OagefSfk/w-d-xo.html
Thanks for the explainer. I've done AMT so many years now but I never really understood the parts outside of the ISOs.
On that note, my AMT is always the higher of the two. In your hypothetical towards the end you mention the AMT without ISOs coming in at 20k compared to 30k. Just curious what are some examples when AMT can be lower?
Since the TCJA changes in 2018, the AMT calc is lower for the vast majority of taxpayers. Apart from exercising & holding ISOs, the main ways I'm aware of AMT kicking in is when realizing a high amount capital gains or having high household income (like over $525k single or $1M jointly) and a lot of itemized deductions.
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Thank you. This was very helpful. Can the process of exercising an ISO be reversed ? If the stock value drops during the Sale, do we also get back portion of the AMT (applicable when exercised).
No, once you exercise your ISO, you own the stock. You can't somehow convert it back to an ISO.
Speaking very generally, the amount you pay in AMT comes back to you through the AMT credit in subsequent years. Selling your shares can speed up the credit, in both scenarios of the stock value going up or down. The details are way more involved than I can fit in a TH-cam comment.
If I'm reading between the lines of your question correctly, there is the scenario where:
- you exercise a bunch of ISOs & hold them past the end of the year
- the bargain element (spread) was large enough that it triggered AMT
- the stock price falls to where it eats up any tax savings and may not even cover the AMT bill
Unfortunately, that's part of the risk of exercising and holding ISOs. One strategy is to purposefully sell (disqualify) some of your exercised ISOs BEFORE the end of the year to lower the bargain element / AMT hit.
Wish I had seen this comment 3 years ago.
Hey do you have any ideas on when to exercise, before IPO, or after IPO? Looks like before IPO could make your AMT lower.
Hi Iris, I actually did a live stream last week that talks about this (skip to 31:20 to get to that specific question): th-cam.com/video/JrehMOJAi-Y/w-d-xo.html
Does this only apply to ISOs bought in the current calendar year? So say I buy 25% of my vested shares this year, would only those 25% affect my AMT for this year? And then next year, if I decide to buy more vested shares, only those bought next year would affect the AMT. Did I understand that correctly?
Hey Jonathan, that's right. The spread/bargain element that is added into the AMT calculation is only for ISOs exercised within the calendar year and held into the next year.
Can you net exercise on ISO's to cover the taxes?
Hi Zachary, can you elaborate?
Where does Amt credit that carries over indefinitely show on tax return. How does one keep track of it for future use?
When you trigger AMT, the amount is calculated on Form 6251. In following year(s), you'd calculate your AMT credit & credit carryforward on Form 8801.
@@JavaWealth if amt credit can be used indefinitely, why is it considered unwise to tip into Amt? Is there a limit on how much can be used per year?
Hi, I addressed this question in my "mailbag" live stream. Hope it helps! th-cam.com/video/h5Yd70T2zwo/w-d-xo.htmlm55s
@@JavaWealth thanks your content is extremely helpful. Please keep producing!
Hi, can you please comment on 83(b) elections after early exercising stocks that are not vested yet? If I file the 83(b), is the unvested stock treated just like the vested stock in the eyes of AMT?
Sure, I plan on creating a video to explain the 83(b) election in more detail as well. Stay tuned.
Filing an 83(b) is saying that you want to realize the bargain element + use the value of the stock on the date that you exercised rather than the future date that it'll vest.
Two considerations that it affects are:
1.) the timing & amount of bargain element considered for AMT purposes
2.) starting the "> 1 year from exercise" clock for the purpose of being a qualifying disposition
DISCLAIMER: This is not to be considered tax advice on whether you should or should not file an 83(b)!
@@JavaWealth thanks so much!
@@JavaWealth , does this mean that if not file a 83b, the spread will be the fmv when early exercised option vesting less the exercised price ? And the spread will only be counted towards AMT , not ordinary income tax ? This is my understanding, but my tax consultant told me that since 83 b election cannot be filed against option, so due to early exercised events, I converted these unvested ISO into unvested restricted stock, so these unvested restricted stock would trigger ordinary income when vesting, just like RSU, his theory sounds legit, but also confused me that there is no difference for early exercise ISO vs NSO.
If I exercise my ISO today(in the middle of 2022), does the AMT gets pluck into my 2022 tax return or 2023 tax return?
Theoretically the AMT should get triggered after you hold for a year from the exercise date, i.e in the middle of year 2023, which then the AMT gets apply to my 2023 tax return, is this correct?
The trigger for the bargain element being added to the AMT calc is exercising & holding into the next calendar year. So in your example, if you exercise today and hold it past 12/31/2022, the bargain element is considered AMT income on your 2022 tax return.
@@JavaWealth I see. Thanks for the reply!
@@JavaWealth Is it possible to exercise ISO in multiple small portion to avoid AMT? For example, i have 3000 unit of ISO and I exercise them in 3 transaction in a single year, i.e. exercised 1000 unit per transaction with each transaction not hitting AMT limit?
You'd still need to total up the bargain elements of all of the exercises that are held through the end of the year. Breaking them up into smaller multiple transactions wouldn't change anything.
is it normal for the company to report the exercised stock option amount on box 1 of a w-2? and the rest of the w2 blank.
- Exercised options that are also sold within the same year is considered income that would be reported in box 1. Did you receive two w2s from the same employer?
- Exercised options that are held through the end of the year wouldn't be reported there b/c it's not considered wage income. This is the scenario where it gets plugged into the AMT calc.
@@JavaWealth oh ok makes sense. Yes, two w-2's
@@JavaWealth So if you hold for a year to avoid short term cap gains, you pretty much always have to deal with AMT? How do you avoid AMT while benefiting from LTCG?