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So I have some ISO stock options (yeah) and three kids in college (boo) so I'm trying figure out the best tax strategy. I was hoping someone help me through the following scenario

Strike Price: $10, 2014 exercise price: $20, 2015 price: $25, 2016 price $30

Lets' assume that all of this happens 2+ years after the grant date and that my "normal" tax bill is right on the brink of the AMT threshold, that the AMT tax rate is 28% and the long term capital gains tax is 15%.

Now I want to run the following scenario

2014: exercise 1000 options
2015: exercise 1000 options, sell the previous years' option after "one year and one day"
2016: sell the 2015 options after "one year and a day" 

Tax wise that would look like this

2014: AMT on $10000 of bargain element so $2800 AMT
2015: AMT on $15000 bargain element $4200, long term gain tax on $15000 = $2250
2016: long term gain tax on $20000 = $3000 

What's the overall tax liability in each year? I can't figure out how the AMT carries forward when the options are finally sold.

Any good pointers to modeling software, spreadsheets or decent papers would also be appreciated.

  • ISO, AMT and complete disregard to the fact that there's more than one country in the world - of course he's from the US. – littleadv Feb 24 '14 at 1:15
  • Oops sorry, yes, it's in the US. – Hilmar Feb 24 '14 at 13:05
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Planning for AMT/Regular issues is complicated, and I suggest you hire a licensed professional (EA/CPA licensed in your state) to do that for you.

Here's my understanding, from merely reading the instructions to form 6251, form 8801, and other various internet articles:

You need to do the calculations twice. For AMT in 2015 and 2016 you do this calculation:

In 2015 you're selling the 1000 options you exercised in 2014, when you paid $2800 tax for the $10000 benefit. The $10000 becomes your basis, so when you sell in 205 for $15000, you only pay long term capital gains on the $5000. At 15% that would be $750, not $2250.

Similarly in 2016 you're selling the 1000 units you exercised in 2015 for $15000 on which you paid $4200 tax. Thus they become your basis, and the gain is again only $5000, not the whole $20000. Your long term gain tax would again only be $750.

For regular income tax you do the calculation you did, and then you need to figure out the AMT credit.

You do this on form 8801 (for each year you have AMT), and it depends on the difference between your "regular" tax and the AMT, and the various exclusion items you had. You then claim this credit on your 1040.


You will end up paying the higher of the AMT or the regular tax, and you need to calculate both always. Most tax preparation software do it automatically.

As I mentioned above - this is a complicated issue, and if you're hitting AMT, you could definitely chip out on a professional consultation with a licensed tax adviser.

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