May 7, 2021
Have you exercised incentive stock options (ISOs) in the past few years? If so, you likely got hit with a sizable Alternative Minimum Tax (AMT) fee. AMT applies when you exercise your stock options, hold onto them, then sell them in a different calendar year from when they were awarded.
The actual tax amount is calculated based on the difference between the stocks’ fair market value and the exercise price.
No one likes paying AMT, seeing as how it cuts into your overall earnings, but you may be able to recoup some of what you had to pay out, in the form of an AMT credit.
When you pay the alternative minimum tax upon exercising your ISOs, you automatically receive an AMT credit that can be used to lower a future federal tax bill if your taxable amount is more than what it would have been under the AMT. Unlike a deduction that lowers the amount of income on which you pay taxes, a credit lowers your taxable amount dollar for dollar. This can result in considerable savings at tax time for anyone who exercised their ISOs but chose not to sell.
If you exercise your ISOs and choose not to sell your stock in that calendar year, you can apply AMT credit to offset your taxes. A change in 2008 now allows taxpayers to claim 50% of unused long-term AMT credit OR the amount of refundable AMT tax credit listed on your previous year’s return, whichever is greater. You can only claim this “carryforward” tax credit in tax years in which you do not pay AMT.
In previous years, you could have recouped some of what you paid in AMT by claiming a credit greater than what you owe in taxes. The difference was paid back to the taxpayer in the form of a refund. However, this provision ended in 2012, and now taxpayers who may have qualified for this type of refund will now need to understand how to apply the AMT credit.
Going forward, you’ll want to partner with an experienced tax professional to accurately calculate your AMT credit and ensure you’re taking advantage of every possibility to lower your taxable amount.