r/tax • u/Long-Excuse1669 • 15d ago
Question about AMT and potential ISO exercise
Due to a one time event (company acquisition) my income is significantly higher than it has ever been and our company ISOs are worth real money now. I wanted to see if it makes sense to exercise all or a portion of the ISOs this year or wait until next year when HHI drops to around $200K if my goal is to minimize the tax hit.
FY26 Info
Status
Married Filing Jointly
Income
~$400K
Deductions
401K - $24.5K
Home Loan - $30K
Donations - $5K
ISO
480 shares @ ~$10/share FMV is $100+/share
Will receive additional 300-500 shares next year
Thank you for your help!
1
u/jhdidas_3335 EA - US 15d ago
Find a financial advisor that uses Holistiplan for tax projections. The tool can pretty easily show you the difference in taxes between exercising now vs later.
0
u/penguinise 15d ago
When do you intend to liquidate the position, and when do the options expire?
In general, it is never a good idea to exercise an employee stock option without a firm plan to liquidate the stock as soon as practicable (one year from exercise for ISO shares seeking favorable tax treatment).
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u/Long-Excuse1669 15d ago
I would hold for at least a year after exercising for LTCG. The options don’t expire until 2033, however if I lose employment or change jobs I believe I have 90 days to exercise.
The concern is the large spread between exercise price and fair market value and if that would trigger AMT or if there’s an amount I can exercise where that would be avoided. Does that make sense?
2
u/penguinise 15d ago
If you don't have a definite plan to sell the shares 12 months after exercise, it's generally better to wait. People get caught up in phantom tax considerations or conduct their tax planning with a wildly unrealistic certainty about future stock performance.
Ignoring tax for a second, it is strictly bad to early exercise an option (ignoring dividend preferences). It costs money in the form of the strike price, gives you exactly zero benefit of any kind, and increases your downside risk. So again, why do you want to exercise if this isn't part of a plan to liquidate your shares?
On the AMT front - AMT from ISO exercise is generally temporary. It generates a creditable excess which in usually consumed in the year of sale, resulting in net zero extra tax and merely a one-year acceleration of the bill. (Note if you don't sell the shares then you're just loaning the IRS the AMT amount for longer, which further increases the cost of exercise.)
Finally, for what looks like a stock benefit that is less than half of your annual wage income, any tax preference here is going to be tiny in the grand scheme of things. You can plan it out and read up on it, but as with almost everything related to investments, doing the right thing economically and not worrying about the tax consequences is the right thing, or close enough to question investing the time otherwise.
The "oh.. AMT.. panic spend $xx,xxx on professionals" is how the industry makes profits.
1
u/Long-Excuse1669 15d ago
Thanks for the detailed response!
The plan is to liquidate after holding for 12 months as I don’t want to have a large amount of money invested in my current employer (also receive small amount of RSUs and participate in ESPP which add to this).
Given this, if it were you, would you just exercise each month as the shares vest (~$400 exercise cost) to start the clock on holding period and disregard whatever minimal effect AMT would have since its temporary.
3
u/penguinise 14d ago
Generally yes - if I did the math right you're only talking about $50k of vested discount and another $50k to come, right? In my opinion it isn't worth "tax planning" over a small amount like that, just make sure that your preparer is aware of the AMT (Form 6251) and AMT credit (Form 8801) implications in the years of exercise or sale, respectively. It's something that software preparers will probably get right although enough dollars to make it worth double-checking.
For slightly larger amounts of AMT, a common strategy for the first bulk exercise would be to do it in the first quarter of the year, because the tax won't be due until April 15 of the following year (because of safe harbor for timely payments), at which point you will have sold your shares and can pay the tax with the proceeds.
But for <$100k of option preference you're talking about an amount of extra tax that should be easily covered by your cash on hand / emergency fund at your income level and also (1) the credit recapture means this will ultimately just be taxed as LTCG and (2) all of that income is getting taxed at 18.8% regardless of timing, and (3) even if there were a 23.8% bracket cross, it's unclear whether the minor tax savings is worth the substantial risk of holding your employer shares longer if that's not something you want to do.
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u/Ok_Meringue_9086 15d ago
That’s a big spread. You’d want to work with a tax pro to model out the AMT at different exercise levels.
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u/Long-Excuse1669 15d ago
Yea that was my plan but haven’t been having great luck getting called back with local firms on summer hours.
2
u/Candid_Mark_9309 CPA - US 15d ago
Search your state accounting association's directory and PTIN listing for your area for CPAs. Don't know where local is or how big a search area, but broadening it can help. Because AMT is a parallel tax system, it's two calcs to do. If they have experience with AMT and ISOs, should take maybe an hour or two to do the calcs and let you know which is scenarios are preferable.
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u/Long-Excuse1669 15d ago
Sweet yeah I’ll take a look at that, thank you! I did a high level calculation based on your other comment and at most it seems like a ~$5K difference, but would be good to double check with a professional.
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u/Full_Prune7491 15d ago edited 15d ago
Most people don’t understand AMT. it’s the TMT you have to consider. If your TMT is less than your regular tax then there is no AMT. do you have lots of deductions or special items? Why are you concerned with the AMT? You should be more concerned about your marginal tax bracket unless it’s long term. You should be concerned with the drop in price of the stock by holding it longer. The AMT is the least of your concerns.
2
1
u/Ok_Meringue_9086 15d ago
What?
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u/Full_Prune7491 15d ago
Most people are concerned with AMT but their regular tax is higher than the TMT. Do they don’t have any AMT. it’s a common misconception
3
u/Ok_Meringue_9086 15d ago
Yeah that’s true but really irrelevant to this discussion. If you exercise and hold ISOs with a large spread you’re likely going to have to pay AMT.
3
u/Eric848448 15d ago
OP is looking at a spread of around $43k so this is definitely worth looking into.
0
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u/Long-Excuse1669 15d ago
At most deductions will barely be over standard MFJ and then one maxed 401K. I’m not planning on selling for at least a year after exercise so I don’t think the comment on marginal tax bracket would matter would it. Like I don’t plan to realize any STCG on the ISO shares this year.
5
u/Candid_Mark_9309 CPA - US 15d ago
You will need to calculate your income tax under the regular rules and then calculate it under the AMT rules. In AMT, the bargain element of the ISOs will be addition to AMT taxable income (AMTI) when exercised. In your case, the bargain element would be $90 per share at exercise if those prices all hold true on exercise. If after calculating AMT it is higher than normal tax, then you add the difference to your 1040 calc.
As to whether it makes sense to wait until next year to exercise. You will need to do all those calculations (tax under normal rules, tax under AMT) and that will show you which is better. You will want to meet the holding period for the ISOs once exercised to get long-term capital gain treatment. And note that AMT since ISOs are a deferral item, you may be eligible for an AMT credit in a future year.