Today’s year-end planning tip will cover Alternative Minimum Tax Considerations With Incentive Stock Options.
The alternative minimum tax or AMT is an alternate tax calculation that is computed by removing many of the typical income tax deductions, like state, local, and property taxes and in some cases including additional income such as from the exercise of incentive stock options, so it can result in a higher tax liability.
The Tax Cuts and Jobs Act significantly increased the AMT exemption amount. Meaning it increased the threshold at which a taxpayer is subject to the AMT. However, this exemption amount will return to pre-Tax Cuts and Job Act levels in the event of a sunset, so more taxpayers may be subject to the AMT.
Planning tip:The exercise of incentive stock options or ISOs. ISOs aren’t considered to be income for regular tax purposes, but it is considered income for AMT purposes. This can result in AMT being due in the year of exercise. For people with ISOs that will be available to exercise pre-2026, it is advisable to take the potential change of exemption into account when developing an exercise strategy.