Biotechnology and pharma stocks had a great run this summer, so now may be a good time to look at your incentive stock options (ISOs) and how recent changes in the calculation of the Alternative Minimum Tax (AMT) may benefit you.
Let’s start by examining what happens when you exercise an ISO.
When you exercise ISOs, there is no immediate tax liability. However, you will be subject to capital gains taxes if you eventually sell the stock. If your exercised shares are held for two years from grant date and one year from exercise date, the “spread” between your grant price and sale price will be treated as a long-term capital gain.
However, for the purposes of calculating your potential AMT exposure, this “spread” is added to your AMT calculation in the year in which you exercise your ISOs.
The Tax Cuts and Jobs Act of 2017 significantly increased both the AMT exemption amount and the income level at which the AMT phase-out exemption starts:
- The 2018 AMT income exemption amount rises to $70,300 (from $54,300) for single filers and to $109,400 (from $84,500) for married joint filers.
- The income where this AMT income exemption starts to phase out in 2018 is also substantially higher at $500,000 for individuals (up from $120,700) and $1,000,000 (up from $160,900) for married couples.
Both of these changes should make it less likely that exercising ISOs will trigger the AMT. So what should be your next steps?
- Assess the amount of ISOs and non-qualified stock options you own, as well as your ongoing restricted stock grants, if any
- Determine your vesting schedule
- Re-examine your current financial situation and understand your near-term liquidity needs
- Keep diversification in mind. This will help you determine what amount of stock to keep after exercising
- Always consult a tax planning professional before making any changes