I exercised an ISO, and did not sell. Why am I taxed with such a high AMT calculation?

[david-h-niswonge]

2820 shares awarded in 2009 at an exercise of 28.20 = $71064. The value on exercise date was 54.56 . the AMT is ~$ 28,900. Can someone work me through the calculation, and how it works when I later sell for long term gain?

[DDollar · Accepted solution]

When you exercise and hold an Incentive Stock Option (ISO) there is no taxable event for ordinary tax.  You merely purchased the stock, and your cost basis is the strike price.  However, for AMT purposes, the difference between what you paid and what the stock is worth at the time of exercise is a "preference item" for AMT.  What that means is that amount is added to your income for the AMT calculation.  In your case, it was quite a bit, so it put you in a situation of having to pay AMT.  That preference amount carries forward and when you sell the stock you will get an AMT credit.  However, while the amount that can be added to AMT income from exercising ISOs is unlimited, the amount of the credit you can take is limited each year.  So, you may or may not recover the full amount of AMT tax you paid upon exercise in the year you sell (if you sell it all in the same year).  Unused preference amounts do roll forward and you will eventually recapture all of it (more than likely).

The calculations are complicated and depend upon your overall tax situation at the time, so it's impossible to say with any specificity what yours will look like.  Make sure you keep copies all your tax documents and worksheets.

[david-h-niswonge]

Thanks, David! It sounds like it would have been better to exercise each year of the 5 year vesting schedule, to avoid a large AMT calc in one tax year?  Also, I should probably sell gradually in future years, to better utilize the AMT credit?

[collegetax17]

Bumping this question: So should a person sell gradually in future years to better utilize the AMT credit? In general? I understand that the answer will be like with many answers to complicated questions: It depends. Yes, it may depend on many other factors. What would those factors be other than other income that year of sale?

[disergio]

It seems I have to pay AMT on my exercised ISO stocks. But what if l don't sell them at all? Taxes paid already. I feel kind of unprotected here.

[DDollar]

You will receive an AMT credit when you sell the stock; however, unlike the tax, you are limited to the amount of credit you can claim each year.

[drew.fong]

Hi David, On this same topic, is the AMT credit automatically carried over each year in Turbo Tax, or is this something that needs to be done manually? Similarly, I exercised ISO's in 2016, paid a good amount of tax that year due to the AMT calculation of the FMV of the ISO's. The company was acquired in 2018 and my shares were sold/liquidated, but the value was significantly less than the FMV in 2016. When I entered this information in TurboTax, it didn't seem to recognize any sort of tax credit from the AMT in 2016, and actually is calculating the sell as a gain since the price it sold for is higher than the strike price. When I try to add AMT Credits, it seems to only allow me to do so for the previous year, but not any years prior to that. Can you assist? Thanks!

[DDollar]

Please post your question by starting a new question, and I'll be happy to address it.  Thanks!

[drew.fong]

Hi David. I did last week. Here is the link. <a rel="nofollow" target="_blank" href="https://ttlc.intuit.com/questions/4520100-i-am-trying-to-enter-a-deduction-for-credit-for-amt-paid-i...>

[DDollar]

I'll take a look.  We're just get started up here.

[DDollar]

Drew, It's already been addressed.  If you repost I can try to answer.

[drew.fong]

Ok, I went ahead and reposted the question to cover what I am hoping to have answered. The previous question I posted was addressed, however, I am still lost 🙂

<a rel="nofollow" target="_blank" href="https://ttlc.intuit.com/questions/4523924-how-to-carry-over-amt-credit-from-2016-for-iso-s-exercised...>

[TomYoung]

As to your "can someone work me through the calculation" question, the Form 6251 is the place to look for that. 

Very simply stated, a whole bunch of your itemized deductions are reversed, that "spread" between what you paid for the stock and its worth gets added, there's a subtraction for an "exemption" amount and then the AMT tax rate gets applied to the resulting taxable income for AMT purposes.  If the tax calculated this way is higher than the tax calculated the regular way, you pay AMT.

Tom Young

[david-h-niswonge]

Thanks, Tom!

[david-h-niswonge]

Thanks, Tom!