Usually, with ISOs you only owe taxes when you sell your shares and do NOT owe any extra taxes in the year that you exercise. However, there is one confusing stipulation: the AMT. If you're not aware of this possibility that you may qualify for the AMT, you could be in for a VERY RUDE surprise when you file your taxes in the year of your exercise date and owe a LOT more cash than you thought you would!
AMT (Alternative Minimum Tax)
- The AMT is a type of tax to ensure that wealthy taxpayers pay at least a minimum tax level
- AMT uses a separate set of rules to calculate taxable income
- The 'spread' between the fair market value at the exercise date and the grant price DOES NOT count towards your ordinary income tax but DOES count towards your AMT
When does the AMT matter when dealing with ISOs?
- If the calculated AMT exceeds the ordinary income tax, then the AMT amount is used
- If you stay below the AMT cross-over point, you will NOT be affected by the AMT
Can I get the extra AMT taxes paid back?
- Yes, it's possible (but not guaranteed) to get the AMT back through a tax credit in future years
- This is a confusing process that likely will require a tax professional for assistance