Tax Tips
The Alternative Minimum Tax (AMT): The Stealth Tax on High Earners and ISOs
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Result: You owe $320k cash by April 15th, even if you hold the stock.
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The Alternative Minimum Tax (AMT): The Stealth Tax on High Earners and ISOs
CORE INSIGHTS
- The Parallel System: The US tax code has two systems: Regular Tax and AMT. You pay the higher of the two. AMT removes standard deductions and taxes “preference items” like ISOs.
- The ISO Trap: Exercising Incentive Stock Options (ISOs) and holding them is the #1 AMT trigger. You are taxed on the paper profit (Spread) even if you haven’t sold the stock.
- The Credit Recovery: AMT paid on ISOs creates a “Minimum Tax Credit.” You can use this in future years to lower your regular tax bill, effectively getting a refund over time.
For most taxpayers, the Alternative Minimum Tax (AMT) is a non-issue. But for tech employees with ISOs, it is a critical threat. The AMT taxes “phantom income”—wealth that exists on paper but not in your bank account.
The AMT Formula
AMTI = Regular Income + Preference Items (ISO Spread) + Standard Deduction.
AMT Tax = (AMTI – Exemption) x 26% or 28%.
*If AMT Tax > Regular Tax, you owe the difference.
What-If Scenario: The Startup Unicorn ($1M Spread)
| Tax System | Calculation Basis | Tax Liability |
|---|---|---|
| Regular Tax | $200k Salary | ~$45,000 |
| AMT System | $200k + $1M Spread | ~$320,000 |
Visualizing the Crossover Point
*Figure 1: The Trap. As ISO Spread increases (X-axis), AMT Liability (Red) overtakes Regular Tax (Blue).*
Strategic Action Steps
1
Calculate Your Breakeven
Work with a CPA to find your “AMT Crossover Point.” Exercise exactly enough options to hit the AMT limit without crossing it. This is “filling the bucket.”
Work with a CPA to find your “AMT Crossover Point.” Exercise exactly enough options to hit the AMT limit without crossing it. This is “filling the bucket.”
2
Early Exercise (83b)
If allowed, exercise options before the stock price rises (Spread = $0). File an 83(b) election. This starts the capital gains clock with zero AMT impact.
If allowed, exercise options before the stock price rises (Spread = $0). File an 83(b) election. This starts the capital gains clock with zero AMT impact.
3
Disqualifying Bailout
If the stock price crashes after exercise but before year-end, sell the stock. This turns an AMT problem into a regular income event (taxed on actual profit only).
If the stock price crashes after exercise but before year-end, sell the stock. This turns an AMT problem into a regular income event (taxed on actual profit only).
The Bottom Line: Who Should Choose What?
- High Spread, Low Cash: Exercise cautiously up to the AMT limit. Do not borrow money to pay tax on volatile stock.
- Low Spread, High Growth: Exercise aggressively now. Paying small AMT today locks in low basis for future tax-free growth.
Frequently Asked Questions
What triggers the AMT?
The most common trigger for high earners is exercising Incentive Stock Options (ISOs). The “Spread” (Bargain Element) is treated as income under AMT rules.
Is AMT money lost forever?
Not necessarily. AMT paid on ISOs generates a “Minimum Tax Credit” (Form 8801) that can lower your taxes in future years when Regular Tax is higher.
What is the 2025 AMT Exemption?
For 2025, the exemption is ~$88,100 (Single) and ~$136,600 (Married). Income below this is generally safe from AMT.
Disclaimer: This content is for informational purposes only. AMT is complex. Consult a tax professional.