employee equity compensation in tech startups
The alternative minimum tax (AMT) is a special tax you may owe when exercising ISOs.
To prevent an unexpectedly high tax bill, make sure to check whether this applies in your case before exercising ISOs.
If you want to get the full picture of how your stock options work, read our Stock Option Starter Guide.
Seci offers the Exercise Tax Calculator, a free tool that helps you compute this.
To use the Exercise Tax Calculator:
How the AMT works is that it builds up in parallel to your regular tax liability, according to a different ruleset. In the end, you pay either the AMT or your regular tax bill - whichever is highest.
Every year that you file a tax return, you’re required to calculate your regular tax liability as well as your AMT. This is an involved calculation, so it is usually done by the software or accountant that you use to file your taxes.
The AMT is a parallel tax system meant as a fallback to prevent excessive tax avoidance.
Back in the 60’s, some Americans got so good at legally not paying taxes that Congress enacted the AMT in 1979. Instead of going through the trouble of fixing our tax code and closing these loopholes, Congress decided that this patch was a better solution.
The vast majority of Americans will never encounter the AMT. Unfortunately for us startup employees, one of the factors that drives up your AMT is the exercise of ISOs.
While not normally taxed, exercising ISOs does increase your AMT. Exercising enough ISOs may put your AMT above your regular tax liability, forcing you to pay the additional tax.