One of the most dangerous AMT triggers is the exercise of incentive stock options ISOs.

This amount is included in your AMT income and thus can trigger the AMT. You may be able to take an AMT credit in the future to offset this liability.

Why not avoid the AMT preference item by selling the stock shortly after exercising the ISOs? Because this could ultimately cost you more taxes. When you sell stock from an ISO exercise after holding the shares at least one year from the exercise date and two years from the grant date , the gain will be taxed at your long-term capital gains rate. However, if you sell the stock earlier, the gain will be considered compensation income and subject to your ordinary-income rate — potentially around 20 percentage points higher than your long-term gains rate.

There are, however, strategies that can help you maximize the benefit of ISOs while minimizing the AMT consequences.

Get The Most Out Of Employee Stock Options

For example, with careful planning you can exercise just the right number of ISOs each year to hit a breakeven point between regular tax and AMT. They would have been far better off had they just made a disqualifying disposition on exercise immediate exercise and sell.

ISOs, please contact us to discuss what strategies are appropriate for your particular situation. Investment, Estate, Retirement, and Tax planning should all be considered in these types of transactions, and working with a CPA who has a Personal Financial Specialist PFS designation is a great place to start.

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