How can i minimize amt

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The information on this site does not modify any insurance policy terms in any way. The alternative minimum tax AMT is pesky. While it was designed to catch wealthy tax avoiders, the AMT may unwittingly snare many others in the middle class these days.

To do so, the AMT creates an entirely new way to figure your taxes, limiting certain deductions and other means to reduce your income. Even AMT tax rates are different from the standard income taxes , and are figured at either 26 or 28 percent. Those most likely to be hit? This is often referred to as the 'golden handcuffs' problem that employees with a lot of stock options can run into. You could exercise a small percentage of your options without hitting AMT for awhile. But to make the highest amount of money with your ISOs in case of a successful IPO, you need to exercise them at least a year before you sell them.

That can give you a pretty nice tax discount, because you get the lower long term capital gains tax rates more on that here. Essentially, you can sell your shares on the same day that you exercise them and cover the cost of exercising including the AMT you trigger by selling a portion of your shares. But in this case, you end up paying the highest tax rate possible on the portion you sell i.

Finally, after your company has gone public, you could still exercise your options a bit at a time to avoid AMT. Next to that, once the company has gone public and your equity is sellable, it's risky to keep all of that wealth locked up in a single stock. Because even though your company has done very well, you never know when circumstances change. The frustrating thing about the AMT is that you have to pay it on a profit that only exists on paper. In future tax years where you don't owe AMT, you can use that AMT credit as a dollar-for-dollar reduction on your tax bill.

Either you or your equity strategists need to keep track of the AMT credit every year going forward to make sure you get your money back. There is a yearly limit on how much AMT credit you can claim, so it can take years to recover past AMT payments depending on how big the initial bill was. But not all startup employees are aware of this benefit, so it's good to know that it exists.

There are two other strategies, but these aren't always possible — it depends on your situation. Note: if your company has grown a lot since you got your ISOs, the A valuation probably already increased and this isn't an option for you. If you believe in the long-term viability of the company, and you think there's going to be a successful exit i.

But these strategies may or may not be in your best interest from a big-picture perspective. For example, if you exercise when the spread is small, you have to balance minimizing AMT, managing your investment risk tolerance, and affording the cash flow associated with such an event. How you are going to pay for the stock you need to buy and how you are going to pay the pending tax bill? When you exercise your stock, you move from having the option to do so at no cost to you to actually buying the stock with real money.

Exercising means assuming investment risk of owning a stock outright. This occurs when you sell previously exercised incentive stock option shares. This information can lead to different outcomes when figuring the AMT credit. In an effort to maximize your AMT credit, you should consider selling lots of incentive stock options shares with the highest spread between the fair market value when you exercised and the exercise price of the option.

These lots will likely be the ones on which you paid the most AMT, so it makes sense they may have the greatest opportunity for AMT credit. The calculation to determine how much AMT credit you will receive goes back to comparing your regular tax and the tentative tax. As we discussed above, when you exercise ISOs and the tentative tax is higher than the regular tax, you likely pay AMT.

When you subsequently sell previously exercised ISOs, the opposite happens. You can drive the tentative tax down below the regular tax. Driving the tentative tax lower can create a tax spread, and along with previously paid AMT, can lead to a tax credit. The larger the spread, the greater the potential tax credit. All else being equal, you can drive the tentative tax down by exercising the lots of exercised incentive stock options that have the greatest spread between original exercise price and the fair market value when you exercised.

Discussing the alternative minimum tax is common when evaluating exercise strategies of incentive stock options. A combination of short-term tax planning and long-term tax planning can help you evaluate the best strategy to implement. In addition, tax is simply one part of the discussion. This risk factor still exists and will likely continue to be a common cause of AMT liabilities.

Such interest is tax-free for regular tax purposes but taxable under AMT rules. Therefore, the new law actually increases this risk factor. Traditionally, assets such as machinery, equipment, computers, furniture and fixtures from a business or from investments in S corporations, limited liability companies or partnerships were required to be depreciated over longer periods for AMT purposes. For both regular income tax and AMT purposes, businesses can now deduct the entire cost of many depreciable assets placed in service between September 28, and December 31, in Year 1.

The TCJA thus reduces this risk factor for newly-acquired assets. Nevertheless, you might benefit from making some changes that will help reduce your exposure to the AMT. For example:. Some taxpayers are in the habit of prepaying state and local income and property taxes that are due early in the following year.