Tax
Alternative Minimum Tax (AMT)
A parallel federal tax system that can require additional tax beyond the regular calculation, especially for ISO exercises.
AMT was created to prevent high-income taxpayers from using too many deductions to avoid tax. It runs in parallel to the regular tax calculation; you owe the higher of the two.
After 2017's tax law changes, AMT affects far fewer taxpayers — but ISO (incentive stock option) exercises remain a major trigger. The spread between strike and FMV at ISO exercise is an AMT preference item, even if you don't sell the shares.
Common pitfalls
- Owing AMT on a paper gain after exercising ISOs — devastating if the stock then drops
- Assuming AMT is dead after 2017 — for ISO holders it's very much alive
- Forgetting to track the AMT credit carryforward, which can recover AMT paid in future years
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