AMT
Alternative minimum taxThe AMT (alternative minimum tax) is a second US federal income tax, computed alongside the regular one on a broader income base with its own exemption and its own two rates. A person owes whichever of the two comes out higher, and the spread on an ISO exercise counts as income under the AMT even though the regular tax ignores it.
What is the AMT?
The calculation starts from regular taxable income, adds back a list of adjustments and preference items, subtracts an exemption that is indexed each year and phases out at high income, and applies 26% up to a threshold and 28% above it. That is the tentative minimum tax; the AMT is its excess over the regular tax, if any.
For the regular tax, exercising an ISO is not income; only a sale is. For the AMT the shares are treated as if the ISO rules did not exist, so the spread at exercise, fair market value minus strike, is added to AMT income that year as an adjustment on Form 6251. Shares sold in the same year make no adjustment: the spread is ordinary income under both calculations instead, capped at the gain on the sale when it is a sale on which a loss, if sustained, would be recognized.
The AMT is not a tax on the spread at some rate. It is the gap between two full calculations, so the same spread can produce no AMT on one return and a large bill on another.
How the AMT works, with numbers
10,000 ISOs with a $2 strike are exercised while the 409A says $12. The spread is $10 a share, so $100,000 is added to AMT income for the year. The cash paid was $20,000, and no cash came in.
Whether that $100,000 produces a bill depends on the rest of the return: the exemption comes off, the two rates apply to what is left, and the result is compared with the regular tax. The shares now carry an AMT basis of $12 and a regular-tax basis of $2.
- FMV at exercise, per share
- $12
- Strike, per share
- − $2
- Spread, per share
- $10
- Shares exercised
- × 10,000
- Added to AMT income
- $100,000
Why the AMT matters
The adjustment is measured on paper value. A private company's shares may not be sellable, so an exercise can produce a tax bill in a year with no proceeds from the shares.
AMT paid because of the adjustment becomes a minimum tax credit, applied in a later year when the regular tax is higher than the tentative minimum tax; what is unused carries forward.
AMT in Taiga Finance
For an ISO grant, Taiga Finance shows the spread: “Spread today $3.30 / sh”, with the total on the exercisable shares, and on a logged exercise the FMV that day beside the price paid.
The year's figures note which spread still carries AMT preference.
Equity compensation →Key takeaways: AMT
- The AMT is a parallel calculation. The tax owed is the higher of it and the regular tax.
- An ISO exercise adds the spread, FMV minus strike, to AMT income in the year of exercise; the regular tax adds nothing until a sale.
- A sale in the same year as the exercise removes the adjustment.
- AMT paid on the adjustment becomes a credit against regular tax in later years, and the shares carry a separate AMT basis.
Questions about AMT
What is the AMT on an ISO exercise?
The alternative minimum tax counts the spread on an ISO exercise, the fair market value on the exercise date minus the strike, as income for the year, while the regular tax does not. If the AMT calculation ends higher than the regular one, the difference is owed.
How does exercising ISOs trigger the AMT?
The spread is added to AMT income as an adjustment on Form 6251. After the year's exemption, the tentative minimum tax is 26% of the remainder up to a threshold and 28% above it, and any excess over the regular tax is the AMT. A small spread can leave the regular tax higher and produce no AMT at all.
What does Taiga Finance show for the AMT on an ISO?
The spread on an ISO grant at the current FMV, per share and in total, the FMV on the day of a logged exercise, and in the year's figures which spread still carries AMT preference.
What happens to the AMT if the ISO shares are sold in the same year?
No adjustment is made. The sale is a disqualifying disposition, and the spread is ordinary income under both calculations, capped at the gain on the sale when it is a sale on which a loss, if sustained, would be recognized.