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Suppose I am in California, and I want to try to roughly calculate the AMT i would owe as well as how much i can get back each year for ISO that i plan to hold for many years. Am i doing this right?

Here's the scenario:

  • $1 exercise price on 1500 shares. (not early exercisable)
  • $101 fair market value at the time of exercise, however not selling
  • $100,000 = regular net income (salary)

The regular federal+state tax rate is probably around ~$28k, and assume that will be the case for many more years to come (you can calculate this yourself if you really wanted to)

The spread is $150,000 ((101 - 1) * 1500), so i am assuming that to calculate AMT, i would basically do $100,000 (regular tax) + $150,000 (spread on ISO) = $250,000. AMT rate is ~28% (Federal) + 7% (for CA) = 35%. so the tax that I owe this year is roughly $87,500 (35% * 250,000).

is this $87,500 roughly correct? (i know that AMT also uses some 50k adjustment for amounts less than $330k, but i'm just going to skip that to assume worst case. same with using 28% instead of 26% for federal rate).

if $87,500 is correct, do i get $59,500 of AMT credit? (since AMT 87,500 - Federeal/state 28,000 = 59,500)

Part 2:

suppose I have that ~$60,000 of credit. (if i did my calculation correct on that, which i doubt)

My regular federal+state for $100,000 is usually ~$28,000. Is the AMT basically: 100,000 - 53,600 (AMT adjustment) * (26% + 7%) = $15,312 ?

so that means that i can claim up to 28,000 - 15,312 = $12,688 of credit each year until my $60,000 runs out?

I asked quite a few tax advisors, but surprisingly no one has given me the same answer, so that's why i'm seeking advice on here.

*disclaimer: the actual numbers are obviously not realistic, but the math behind it is important.

1

Kindof, yes.

You can claim AMT credit, but your overall tax cannot go below the AMT calculation.

Suppose this year you accumulated $60K AMT credit.

Next year you don't exercise ISO options, and your regular tax is 28K. AMT for that year is ~15K. You can apply $13K.

But you're mixing up State and Federal AMT, these are unrelated things. You need to calculate Federal AMT only, and that's the credit you use on your Federal tax returns. Then - deal with the State, per State rules. That goes to your State return. These are entirely unrelated taxes.

  • +1 but I was surprised to not see "you are exercising $1.5M of stock options. It's worth the relatively small amount a pro will charge you for this tax advice." – JTP - Apologise to Monica Feb 27 '15 at 20:55
  • @JoeTaxpayer it's actually only $150,000 in the example, not 1.5MM. I've spoken to a couple of tax advisors, but I have not met a tax advisor i trust yet. For example, not one of them has even suggested/knew any optimizations (i.e. exercising just enough every year so that your AMT matches your Federal/State regular tax). – Dzt Feb 27 '15 at 21:05
  • @JoeTaxpayer do you have a strategy for finding a good tax pro who would be very familiar with this? (i will eventually find a tax advisor in Silicon valley, if/when the stock does get to be more like 1.5MM like you said) – Dzt Feb 27 '15 at 21:18
  • @Dzt that may not be such a good optimization. You need to hold for a while for the tax benefit, so the later you exercise the later you can sell. Generally you don't want to be tied to your employer with your investments. If you expect your income to rise, having AMT credit to offset it may be helpful. – littleadv Feb 28 '15 at 6:20

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