2

I'm at a startup and I just exercised my incentive stock options. I believe I'll need to pay the alternative minimum tax (AMT).

Is there anything to be done this year or should I wait until tax filing in April of next year?

For example, sending a check to the IRS, anything to increase AMT credits (which admittedly I don't fully understand), or any action that will mitigate the tax burden.

  • When you exercised your stock options, did you cash them out entirely? Convert them entirely into stock? Or convert them into a mix of cash and stock, where there is enough cash to cover your incremental income taxes and payroll taxes? Did your employer withhold taxes at your incremental rate? – Jasper Dec 8 '16 at 2:12
  • Did you exercise the option and sell the stock? Or just exercise the option? Note that exercising the option usually doesn't get you an immediate tax bill, as it involves you buying the stock at a low price. However, restricted stock units do (because you receive the stock as compensation). Could you explain more about how your transaction worked? – Brythan Dec 8 '16 at 4:18
  • 1
    @Brythan OP is talking about AMT. Apparently the fair market value of the shares he purchased has gone up, and the discount (fair market value - strike price) is counted as income under the AMT system. – Craig W Dec 8 '16 at 13:23
  • @CraigW is correct, the fair market price is indeed higher than the strike price and so I'm subject to AMT. – Zephyrus Dec 8 '16 at 23:43
  • @Jasper, when I exercised, I did nothing with the resulting stock. The stock is in a privately held startup. Nothing was withheld. – Zephyrus Dec 8 '16 at 23:44
4

Much like if you had a large capital gain with no withholding, you should determine if you'll be at risk of an underpayment. Generally this means you end up owing more than $1000 at tax filing time, though there are some safe harbors. Unfortunately that is more difficult with AMT and its interplay with the regular income tax system. But you should be able to estimate how much extra you'll owe. With that information, you have two options. You can either pay estimated taxes, or if you have a W-2 job, just adjust your withholding.

Keep in mind if you're exercising now, the penalty should be pretty minimal since it's only for part of the year, and interest rates are low.

  • Follow up question: how much will the underpayment/interest be? – Zephyrus Dec 9 '16 at 3:52
  • 1
    Just a note that the IRS makes allowances for surprise underpayment. It says "avoid this penalty if they either owe less than $1,000 in tax after subtracting their withholding and estimated tax payments, or if they paid at least 90% of the tax for the current year or 100% of the previous year" So if you got a refund last year you don't have to worry. And I think the underpayment fine is only $30. – kweinert Dec 9 '16 at 12:58

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.