How to avoid Alternative Minimum Tax?
September 3, 2007 10:22 PM   Subscribe

I want to exercise some ISO stock options and I want to avoid paying Alternative Minimum Tax. How do I calculate how many options I can exercise without triggering AMT?

My understanding is that the number that is important is the current value of the shares I exercise minus the cost of exercising them.

Also, does a larger net income allow more shares to be exercises without triggering AMT compared to a smaller income?

I was thinking of getting this year's Turbo Tax (available less than $10 now) and plugging in numbers until I find the amount that would trigger AMT. But that would be the 2006 tax rules, not the 2007, although it may be close enough.

Is there an easy figure this out? Thanks.

(I do know there is talk of changing the rules for AMT, but you can't depend on Congress on doing that.)
posted by ShooBoo to Work & Money (5 answers total)
tax accountant time!
posted by Heywood Mogroot at 12:39 AM on September 4, 2007

Congratulations, you have ISOs! You need to hire an accountant. Get them to come up with two estimates; one without the ISO exercise, one with a maximum exercise. That will be easy for the accountant to do. From there you can ask them to guess roughly how many ISOs you can exercise before tipping over.

There is no particularly easy way to figure this out. The basic rule is that the spread on the ISOs counts as income under AMT, but not under normal taxes. So it all depends on how close you are to AMT right now. In general the more money you make, the closer you are to AMT, up to $200k a year or so. But it depends on your income sources. It also depends on your state. Californians are particularly susceptible to AMT since our high state income tax is not deductible under AMT. Homeowners get caught by AMT too; property tax isn't AMT deductible.

Do not trust Turbotax for you to do this. I know for at least two different tax years it's calculated ISOs wrong. You need to hire someone. And do it soon; the future benefit of that exercise can be quite significant since it can push your future stock gains into long term capital gains.
posted by Nelson at 5:57 AM on September 4, 2007

Don't be afraid of the AMT. Everyone should have such problems. If you are paying it you made some serious money. That being said, most of us would like to minimize our taxes. You don't need turbotax or an accountant, all you need are last year's tax forms and the tables for next year to be completely accurate. Those tables are not yet available and it gets even worse. The exemption for 2006 was $62,550, but the law raising the exemption expired and it has now fallen back to the original $33,750! This likely will change by year end, but who knows. The safest bet is to use last year's numbers.

An quick and dirty way to calculate your AMT is to add up all your income, deduct only your charitable deductions and then calculate your exemption using last year's tables. Subtract your exemption and multiply by 28%. Is this amount greater than your regular tax? If so, you have fallen into the AMT.

Of course, if you are at all uncomfortable with the numbers and forms, and if your iso income is large enough, then it might be best to use an accountant. Just make sure anyone you use is well versed on the topic of isos.

One more point, all this assumes that you are going to exercise and hold the stock for one year. If you are going to exercise and then immediately sell the stock then the spread becomes regular income rather than an amt preference item. It could still have an amt effect though if you are close enough to the amt already by increasing your state tax deduction and by decreasing your amt exemption.
posted by caddis at 7:05 AM on September 4, 2007

Don't be afraid of the AMT. Everyone should have such problems. If you are paying it you made some serious money.

No, do be afraid of the AMT, and while you're at it be afraid of bad tax advice from teh Internets.

The problem with AMT on ISOs is that you haven't made any actual cash the year you exercise the ISO. But you still owe the tax when you exercise. It can be quite expensive. Worse, if the exercised stock ends up being worthless it can be very difficult to ever recover the AMT tax you paid up front. Some unfortunate people in the late 90s bankrupted themselves paying AMT only to find the stock was worthless the next year and then got stuck with an AMT credit they could never recover.

If you expect your ISOs to be worth over $10,000 some day, get an accountant. Even if you figure this part out yourself, your tax life is only going to get more complicated in the next years with your ISOs. Hire an accountant early.
posted by Nelson at 8:19 AM on September 4, 2007 [1 favorite]

nthing get thee to an accountant. ours saved us $18K in taxes in exactly your situation. money well spent.
posted by killy willy at 9:24 AM on September 4, 2007

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