March 10, 2021
If you decide to exercise your stock options, do you know how much alternative minimum tax (AMT) you’ll have to pay?
Use our calculator to find out:
Here's what you'll get:
If you exercise enough of your stock options at once, then yes, you may end up owing a significant amount of taxes.
With incentive stock options (ISOs) specifically, these taxes come in the form of the alternative minimum tax (or AMT).
And—depending on your circumstances—the AMT could add tens of thousands, hundreds of thousands, or even over a million dollars to your cost of exercising.
Note: If the AMT puts exercising your options out of your reach, we can help.
Though the alternative minimum tax runs alongside the regular income tax system, the way in which it is calculated is very different.
When it comes to your incentive stock options (ISOs), you will only have to pay AMT if…
1. You exercise your ISOs and you do NOT sell those shares within 365 days (one year) of exercising, and
2. The difference (a.k.a. spread) between the strike price (a.k.a. exercise price / grant price) of your shares and the 409A valuation (a.k.a. fair market value) of your stock today pushes your income past a certain level.
For example, if the cost of exercising your options is $100,000 ($1/option x 100,000 options) but the 409A valuation currently values the stock at a total of $500,000, then that $400,000 difference will likely put you into AMT territory.
There are many different factors that can play a part in determining at what point exactly you’ll have to pay AMT — as well as what you will eventually owe.
Our Exercise Tax Calculator accounts for all of them. Fill in your equity details and get the full tax breakdown. All Secfi tools are completely free of use.
Not always. You will only be subject to pay the alternative minimum tax if the value of any options you exercise puts you above the AMT exemption amount, defined by the federal government and dependent on your tax situation for the year. (The calculator automatically accounts for this exemption.)
It's also important to know that ISOs are only taxed when you exercise them, not when you're granted them or when they vest / become exercisable.
The good news is that, yes, you can – for a limited number of ISOs per year.
In any given year, unless you have other income factors affecting your finances, your regular income tax amount is going to exceed that of your AMT, so you will only have to pay that amount.
The gap between these figures enables you to exercise stock options to the point that you reach your regular tax limit, but not exceed it. The bigger the gap the more stock options you can exercise without triggering AMT.
So while you can never fully avoid AMT, with some careful planning you can reduce its impact.
To compute exactly how many ISOs you can exercise within this gap every year is tricky. But you don't have to — Secfi offers a calculator built to do that for you. It's called the AMT Crossover calculator, and you can find it by:
No, you don’t.
Alternative minimum tax is not an additional tax you will have to pay, but a—well—alternative tax. You only pay it if it goes higher than your regular tax amount, in which case it replaces that amount. That means you only pay one or the other, never both.
Think of it this way: when you’re just making salary your AMT is going to be less than your regular tax, so you won’t have to pay it.
However when you exercise your stock options and accelerate your earnings then it is likely to outstrip the regular tax rate making you liable for AMT.
While no one is going to be happy about paying AMT on their stock options, there is a silver lining in the form of the AMT credit.
This credit is automatically generated when you pay your AMT tax bill and can be used to lower your income taxes to the extent that your regular tax liability exceeds the AMT in future years.
Unlike traditional deductions, this credit represents a dollar-for-dollar discount on your tax bill.
Essentially that means that you are paying upfront a portion of the capital gains tax you will expect to pay when you sell your shares.
So while your AMT tax bill might seem overwhelming at first, it can help to see it as a prepayment of future taxes. If you’d like to know more, you can find information about the AMT credit here.
Want to find out how much AMT you might owe if you exercise your options? Use our calculator to find out exactly what you will owe.
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