What You Should Know About the Alternative Minimum Tax and Incentive Stock Options

Most people understand that taxes can be a little more complicated when you have incentives stock options and other equity compensation. What they may not know is that income tax isn’t just about tax brackets to calculate your regular taxable income. The federal income tax system has a sister system that figures how much tax you may owe due to the Alternative Minimum Tax (AMT). AMT may kick in when your income goes over a certain threshold or when you engage in certain activities, namely exercising and holding incentive stock options.

Incentive stock options are a type of equity compensation you may receive as part of your overall compensation package. Incentive stock options, or ISOs, allow you to buy company stock at a fixed price for a set period of time, regardless of the current fair market value of the stock. In the best circumstances, incentive stock options can be a tool to generate significant wealth if...

Incentive stock options are a powerful compensation tool that can help you grow your wealth. Companies award them to employees as a retention vehicle, to reward specific successes or as an incentive when trying to attract new employees. There are several advantages to incentive stock options. Because they can provide you with a significant opportunity,...

If you have stock options, then you can access an asset that provides you with a choice. Very literally, a stock option is an option; it’s a form of compensation that gives you the right (but not the obligation) to buy shares of company stock at a set price. Acting on this choice is known...

If you have employee stock options, you need to determine what kind you have: incentive stock options (ISO) or non-qualified stock options (NQSO). The differences go far beyond their names. ISOs may provide tax advantages for you, assuming you meet certain requirements. For this reason, many people prefer incentive stock options over NQSOs. But with...

The alternative minimum tax (AMT) acts as a sort of parallel tax system to the regular federal income tax system. For taxpayers, this means they need to calculate their income twice: once under the regular tax rules and a second time under AMT. After running this calculation, taxpayers then pay whichever is highest. AMT was...

Incentive stock options are unique in that the longer you wait to exercise, the costlier it may be to exercise and hold your shares. That’s not because exercising the incentive stock option cost more, as that price is fixed, but because the cost of the alternative minimum tax (AMT) may be higher. One concern with...

Finding the best time and best strategy to exercise incentive stock options is difficult. Competing considerations on income tax, investment planning, and financial planning make it difficult to address the best time to exercise incentive stock options (ISOs) with a blanket answer. Some strategies suggest that exercising early may be a good idea, because this...

When you exercise and hold incentive stock options, it’s very possible that you will be subject to the alternative minimum tax (AMT). This part of the tax code gets complex, making it difficult to understand. One way to think of the AMT is a pre-payment of income tax on exercised incentive stock options — but...

If you have incentive stock options, you’ve likely heard the term alternative minimum tax, or AMT. But what is the AMT, and how is it calculated? It’s a type of income tax, but very different than what you may be used to paying. Typically, the calculation of your total income tax due is subject to...