How to Avoid AMT on Incentive Stock Options
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Exercising Just Enough Options to Avoid AMT
If your employer offers Qualified Incentive Stock Options as a part of your benefits, it pays to know how many options you can exercise without becoming affected by the Alternative Minimum Tax.
Alternative Minimum Tax or AMT was created to prevent the wealthy from avoiding their tax liabilities. All taxpayers must pay the higher of their regular tax liability or their AMT. Most Americans aren’t subject to AMT, but stock options could push you there if you aren’t careful.
To determine how stock options would affect your tax liabilities, you can use an AMT calculator in the following link and play with the numbers. https://www.esofund.com/blog/amt-tax
First, you enter your tax liabilities for the year based on your regular income. Then you enter stock options one at a time to see if your tax liability changes. When you get to the point that your tax liability increases greatly, you have hit your limit.
To use an AMT calculator, you must know the stock’s fair market value on the date you plan to exercise your options. As you enter the shares, your AMT may increase or not. If it doesn’t, you’re in the clear and can redeem your options, if not, limit the number of options you redeem to avoid AMT.
Why Should you Care?
AMT will increase your tax liability and take away the benefit of Qualified Incentive Stock Options. If you limit your shares to just below the threshold, you can enjoy the long term capital gains benefits of owning the stock (assuming you keep it for over a year). This limits the taxes you’ll pay on the shares and allows you to enjoy more of this employee benefit.
If you have questions about whether you should exercise your ISOs or if they would trigger a much larger tax obligation, contact us today and we’ll help you determine how to proceed to keep your tax liabilities as low as possible.