What is the alternative minimum tax and how does it relate to planning for exercising incentive stock options?
The Federal income tax is actually a parallel tax system. There is a “regular” tax that most of us are fairly familiar with. There is also an “alternative minimum tax” (AMT). Your tax is computed using both methods, and you generally pay the higher tax. If the alternative minimum tax does apply, a portion of the excess over the regular tax may be available as a tax credit in a later year, treated somewhat like a prepayment of the later year’s tax. The alternative minimum tax rates are 26% for the first $175,000 of alternative minimum taxable income (AMTI) and 28% for AMT income over $175,000. Single persons have an AMT exemption of $33,750, phased out by 25% of the excess of AMTI over $112,500, and eliminated for AMTI of $247,500 or more. The AMT exemption on a joint return for married persons is $45,000, phased out by 25% of the excess of AMTI over $150,000, and eliminated for AMTI of $330,000 or more. The alternative minimum tax is a critical concern relating to ISOs. The excess of t
