How to Track Your AMT Credit After Exercising ISOs
Alternative Minimum Tax (AMT) can feel like a mysterious, looming tax trap when you’ve been granted Incentive Stock Options (ISOs). It’s easy to ignore at first, but misunderstanding AMT can lead to a surprise bill when you exercise your shares. And if you’ve already paid AMT, you need to track it carefully so you don’t leave money on the table later.
What Is AMT?
AMT is essentially a parallel tax system that runs alongside the regular income tax system. Most people never pay AMT because their regular tax bill is higher. But ISO exercises are one of the few events that can trigger it.
When you exercise ISOs and hold the shares, the “bargain element,” the difference between the stock’s fair market value and your exercise price, is added to your AMT calculation for that year. If the AMT calculation comes out higher than your regular tax, you pay the AMT amount.
How Exercising ISOs Triggers AMT
Exercising and holding ISOs can create an AMT liability even if you never sell your shares. That’s because the IRS counts the bargain element as income for AMT purposes the moment you exercise, regardless of whether you have cash in hand from a sale.
Paying AMT Creates a Future Credit
Here’s the silver lining: when you pay AMT, you may receive an AMT credit, which can reduce your regular tax in future years.
Example:
2023 – May B. Rich exercises her private company ISOs and owes $10,000 in AMT.
2024 – She has no AMT triggers, and her regular tax is $3,000 higher than her AMT calculation. She can apply $3,000 of her AMT credit to lower her tax bill.
May can continue using the remaining $7,000 credit in future years until it’s fully used or until she sells the ISO shares that triggered the AMT. When she eventually sells after a qualified disposition, her shares will have two cost bases:
Regular tax basis: her exercise price
AMT basis: the fair market value at exercise
That higher AMT basis often allows her to use more or even all of her AMT credit in the year of sale.
How to Track Your AMT Credit
After the year you pay AMT, you need to:
File Form 6251 (AMT calculation) and Form 8801 (AMT credit) each year.
If you live in a state with its own AMT, track the state’s credit forms as well.
Don’t skip these filings. The IRS will make sure you pay enough tax, but they won’t remind you to claim your AMT credit. If you don’t keep good records, you could end up overpaying.
Key Takeaway:
Paying AMT on ISO exercises isn’t the end of the story. Think of it as a prepayment of tax. Meticulous tracking of your AMT credit can help you reclaim those dollars in future years and lower your lifetime tax bill.