Alternative Minimum Tax (AMT)
A parallel tax system that recomputes your bill with fewer deductions — triggered most often by large ISO exercises, and owed when it exceeds your regular tax.
The AMT recomputes your tax under a separate set of rules with fewer deductions, and you pay whichever is higher. For households with equity comp it bites most often when you exercise incentive stock options (ISOs) and hold them — the bargain element becomes an AMT preference item even though no cash changed hands. Previewing the AMT hit before you exercise is the difference between a planned move and an April surprise.
A parallel tax you might owe instead
The Alternative Minimum Tax is a second tax calculation that runs alongside the regular one. You add back certain deductions and preference items, subtract the AMT exemption (which phases out at higher income), and apply the AMT rates. You pay whichever system produces the larger bill. For most households the regular tax wins; for those exercising incentive stock options, AMT is where a paper gain becomes a real tax.
Why ISO exercises are the usual trigger
When you exercise an ISO and hold the shares, the spread between the strike price and the fair market value is invisible to the regular tax but counts as income for AMT. Exercise enough, and that phantom spread pushes you into AMT — you can owe tax on a gain you haven't sold. The good news: AMT you pay on an ISO exercise generally becomes a minimum-tax credit you can recover in later years.
How Formation handles it
Formation tracks your option grants and charts the AMT-crossover point — how many ISOs you can exercise before the spread tips you from the regular tax into AMT — against your projected income. The decision of whether and how much to exercise, and when, stays a conversation with your CPA; Formation makes sure you walk in with the line already drawn.
A worked example
You exercise 10,000 ISOs with a $2 strike when the shares are worth $12. You sell nothing, so the regular tax sees no income — but AMT sees a $100,000 “bargain element.” That preference item can put you in AMT and generate a tax bill on stock you still hold, with the AMT paid recoverable later as a credit.
Frequently asked
Do I owe AMT if I exercise ISOs and don't sell?
Possibly. The spread at exercise is an AMT preference item even if you hold the shares, so a large exercise can create an AMT bill on an unrealized gain. Modeling the crossover before year-end is how you size the exercise.
Can I get the AMT back?
Often, yes. AMT paid because of an ISO exercise generally creates a minimum-tax credit you can use to reduce regular tax in future years, though recovering it can take time.
In Formation
AMT preview before you exercise
See this in your own numbers.
Formation organizes your whole household by entity and cites every figure to its source — the context that makes terms like this actionable.
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