How to Exercise Just Enough Options Each Year to Avoid AMT

Qualified Incentive Stock Options (ISOs) are not subject to ordinary income tax when exercised but are subject to Alternative Minimum Tax. Most people are not subject to AMT if they are not exercising options, so you can use our AMT calculator to determine just how many shares you can exercise each year before tripping the AMT threshold. The basic idea is to set up your tax program to calculate your likely taxes for this year except indicate that you only exercised one share. You'll need to know the current Fair Market Value (FMV) of your shares in order for the software to calculate your tax impact. Then go back and change that 1 share to 2 shares and see if your tax increases. If not, then you aren't subject to AMT at all. If it goes up right away, then you are subject to AMT based on your base income regardless of how many shares you exercise. But if not, then gradually increase the number of shares you exercise until your taxes due/refund finally changes. That will be the threshold where you first trip AMT, so you can exercise up to that many of your ISO shares without tax consequences and thereby get a head start on your eligibility for long term capital gains treatment. You also have the benefit of avoiding larger amounts of AMT that would otherwise be due if you were to exercise these shares later on when the current FMV of your shares is higher.

If you can't afford the cost or bear the risk of exercising your shares, you can contact us at the ESO Fund for non-recourse funding against those shares. If those shares turn out to not be a good investment, ESO bears the loss as opposed to you. Visit this page for more ideas on how to save money on stock option taxes.