Alternative Minimum Tax (AMT) was designed to ensure that tax payers with access to favorable tax shelters pay at least a minimum amount of tax. The AMT rate is lower than the ordinary income tax rate applicable to the same level of income since it is considered a minimum amount. The calculation of AMT is based on calculating your taxes two ways and paying the higher figure. If the AMT calculation is higher, then the difference of the AMT method over the ordinary method is your Alternative Minimum Tax. A natural consequence of exercising NSO shares that require immediate payment of ordinary income tax is that it raises your average tax rate paid which will lower the amount of AMT due almost dollar for dollar using the general formula just mentioned. As such, it is common for employees facing high taxes to have the Employee Stock Option Fund (ESO) cover the cost of exercising the NSOs while the employee exercises the less expensive ISOs at the reduced rate.
To calculate your savings precisely, follow the instructions on our AMT Calculator with the added instruction of entering your NSOs only after you’ve calculated your AMT. In other words, first determine your AMT and then enter your proposed NSO Exercise knowing that ESO will cover the NSO-related taxes. You’ll notice how much your AMT goes down and that is a simple benefit that falls out of merely having ESO involved. Moreover, you can maximize your benefit by having ESO cover the cost of the AMT and ISO exercise as well.
The Employee Stock Option Fund can help alleviate the financial risk of exercising on your own by providing the funds to exercise stock options and to cover the applicable taxes. No repayment is due unless and until there is a liquidity event involving the company that issued the shares, such as a sale or IPO. If the final value of the stock is insufficient to repay ESO, ESO still bears the loss on your behalf.
For more information regarding how working with ESO can benefit you, please contact us. Note that many other factors such as deductions, your tax bracket, state income taxes, and capital gains will also impact your final AMT calculation. Since the ESO Fund has no way of knowing how your final taxes will look, you are advised to work with tax professional to minimize your risk of not having sufficient funds when you finally file your tax return. The ESO Fund is not obligated to increase its cash advance to you at a later date.