AMT stock option scenario

Incentive stock options (ISOs) are a type of tax-advantaged stock granted to employees to buy shares, typically at a price lower than the fair market value. ISOs can be taxed as long-term gains, instead of regular taxable income.

How do you avoid AMT on stock options?

The way to avoid triggering AMT is by finding your so-called AMT crossover point. Basically, that’s the gap left between your current income and the amount that would trigger AMT.

What are AMT options?

The AMT is charged when you exercise your ISO, hold on to your shares and sell them after the calendar year in which they were awarded to you. The AMT is calculated based on the difference between the fair market value (FMV) of the shares on the date that you exercised the shares and the exercise price.

Are nonqualified stock options subject to AMT?

There are no tax consequences when you first receive your non-qualified stock option, only when you exercise your option. Also, while there are no direct alternative minimum tax (AMT) consequences to exercising a non-qualified stock option (as there are for ISOs), higher reported income may subject you to AMT.

How does the AMT credit WORK example?

The difference between the orange and the grey line is the amount of the credit you will receive. For example, if your taxable income were $200,000, your regular tax liability would be $30,818 and your AMT liability would be $23,556, allowing you to use $7,262 of your AMT credit.

How does exercising stock options affect AMT?

In the year that you exercise an Incentive Stock Option, the difference between the market value of the stock on the exercise date and the exercise price counts as income under the AMT rules, which can trigger an AMT liability. However, you will also generally earn an AMT credit in that year.

How do I optimize AMT?

In an effort to maximize your AMT credit, you may want to consider selling lots of incentive stock options shares with the highest spread between the fair market value when you exercised and the exercise price of the option.

What triggers AMT?

The Alternative Minimum Tax (AMT) is triggered when taxpayers have more income than an exemption amount and they make use of many common itemized deductions. You must calculate your tax twice if your income is greater than the AMT exemption.

What is the AMT rate for 2021?

28%

The 2021 AMT rate of 28% applies to the excess of $199,900 for married filing jointly taxpayers. $199,900 (2021 AMT limit for 26% tax rate) X 26% = $51,974. ($312,000 – $199,900) X 28% = $31,388.

How is AMT calculated?

Calculating the AMT is complicated. Taxpayers first calculate their “normal” adjusted gross income, then add back in certain items. Next, they subtract the applicable AMT exemption amount, multiply that by the appropriate AMT tax rate and subtract the AMT foreign tax credit to calculate a “tentative minimum” tax.

How does AMT work for capital gains?

With the AMT, you have to consider the impact of the reduction in the exemption. On top of the $150 in capital gains tax, the $1,000 of capital gains income would reduce your exemption by $250. You’d end up paying AMT on that $250. At a 28% rate, that would incur additional tax of $70.

Do you pay AMT and capital gains?

Long-term gains (e.g., profits from selling a home or other investments) are taxed at the same rate under both systems, but capital gains could put you over the AMT exemption threshold. That could cause the AMT to kick in, which means you may not be able to deduct state income taxes you paid.

Does AMT apply to capital gains?

While capital gains generally qualify for the same lower rates under the AMT as under the regular tax rules, a capital gain may cause you to lose part or all of your AMT exemption.

Does RSUs trigger AMT?

In years when large blocks of RSUs vest, your ordinary income tax will usually exceed your AMT due to the additional ordinary income. As long as that’s the case—you’re not in AMT—you can use state income tax and property tax deductions to reduce your ordinary income tax liability.

Do you pay taxes twice on stock options?

If you follow IRS rules when you report the sale of stock bought through an ISO, you’ll avoid being taxed twice on the same income. The broker your employer uses to handle the stocks will send you a Form 1099-B.

When should you exercise stock options?

If you have liquidity, exercising incentive stock options in January or December can be a good strategy. By exercising in January, you can assess your entire tax situation at the end of the year and decide whether to sell the stock before 12/31 to likely avoid the AMT.

Is it better to sell or exercise an option?

Occasionally a stock pays a big dividend and exercising a call option to capture the dividend may be worthwhile. Or, if you own an option that is deep in the money, you may not be able to sell it at fair value. If bids are too low, however, it may be preferable to exercise the option to buy or sell the stock.

What happens if you don’t exercise stock options?

If you don’t exercise an out-of-the-money stock option before expiration, it has no value. If it’s an in-the-money stock option, it’s automatically exercised at expiration.

What happens if you don’t have enough money to exercise option?

If you don’t have enough buying power or shares to exercise your option, we may attempt to sell the contract in the market for you approximately 1 hour before the market closes on the options’s expiration date.

Do brokers automatically exercise options?

Brokers have in house rules for who gets assigned prior to expiration but they are not involved in the auto exercise decision for ITM options at expiration.

Can you exercise options immediately?

Companies usually won’t allow you to exercise your stock options right away. Instead, you may have to stay at the company for a certain amount of time (usually at least a year) and/or hit a milestone. The process of earning the right to exercise is called vesting. You can usually only exercise vested stock options.

Should I exercise options early?

Early exercise could help you sidestep taxes. If you’re able to purchase company shares when the strike price is close to the market price, you can file an 83(b) election to request that the IRS recognize your income at this point in time — before the shares appreciate further.

What happens when call option hits strike price before expiration?

When the strike price is reached, your contract is essentially worthless on the expiration date (since you can purchase the shares on the open market for that price). Prior to expiration, the long call will generally have value as the share price rises towards the strike price.

When should you close a call option?

Traders will typically sell to close call options contracts they own when they no longer want to hold a long bullish position on the underlying asset. They sell to close put options contracts they own when they no longer want to hold a long bearish position on the underlying asset.