If you exercise Incentive Stock Options (“ISOs”), you may be subject to Alternative Minimum Tax (“AMT”). AMT is a parallel tax system imposed on an alternative, more comprehensive measure of income, which includes the unrealized gains of ISO value and fewer opportunities for deductions. If the calculated AMT exceeds the ordinary income tax, then the AMT amount is used.
Note that this is an oversimplified estimate that focuses exclusively on ISOs and their impact on AMT. This is not legal or tax advice. For assistance with your specific situation, please consult a tax lawyer.
Given your input, here’s an AMT estimate for 2022.
How to calculate AMT
We first start with the adjusted gross income. For the purposes of this back-of-the-envelope estimation, we use the annual gross salary. However, there are many other adjustments that influence this number. Learn more about determining the adjusted gross income.
To get to the alternative minimum taxable income (“AMTI”), there are many income adjustments applied to the adjusted gross income. This site only considers the value of ISOs when exercised (the most recent 409A appraisal of the stock less the strike price). However, there are many other types of deductions subject to AMT.
To calculate the AMT base, we take AMTI and less the AMT exemptions. The actual exemption amount depends on the filing status and total AMTI. Here is the table for determining the exemption amounts for 2022:
To prevent upper-income taxpayers from benefiting from the exemption, it “phases out” as AMTI increases. For every $1 beyond the phase out amount, the exemption amount is reduced by $0.25. For example, a single person who has AMTI of $544,300 will only have 75,900 - ((544,300 - 539,900) x 0.25) = 74,800 of exemptions. Learn more about calculating AMT exemptions.
We calculate the tentative minimum tax by applying the AMT rate (either 26% or 28%, depending on the amount) to the AMT base. For 2022, the threshold where the 26 percent AMT tax bracket ends and the 28 percent AMT tax bracket begins is $103,050 for married filing separately and $206,100 for all other filing statuses.
Finally, we compare the tentative minimum tax to the ordinary income tax. Ordinary income tax is calculated based on a varying rates associated with your gross income after the standard deduction, as well as the filing status (the table for 2022 is below). The ultimate payable tax will be the greater of either the tentative minimum tax or the ordinary income tax.
Here is the table for ordinary income tax brackets:
The rate on the left applies to income from that row to the one beneath it. For instance, a single person with $150,000 in income will pay 10% on the first $10,275, 12% on the next $31,500, and so on.
Additional Reading
- What Exactly Is The Alternative Minimum Tax (AMT)? (Forbes)
- Alternative Minimum Tax (AMT) for Individuals (This Matter)
- How Does the Alternative Minimum Tax Work? (Nerdwallet)
- Alternative Minimum Tax: Common Questions (Turbotax)
- Stock Options and the Alternative Minimum Tax (AMT) (NCEO)
- What’s your AGI? (CNN Money)
- How To Calculate AGI For Tax Purposes (Investopedia)
- What is a 409A valuation? (Quora)
- The AMT Exemption (AMT Advisor)
- 2022 Tax Brackets (Tax Foundation)
- Evaluating Exposure To The Alternative Minimum Tax And Strategies To Reduce The AMT Bite (Kitces)