What is the alternative minimum tax (AMT)?

The alternative minimum tax (AMT) is a special tax you may owe when exercising incentive stock options (ISO).

To prevent an unexpectedly high tax bill, make sure to check whether this applies in your case before exercising ISO.

How do I know if I owe AMT when exercising ISOs?

Use our Stock Option Tax Calculator, a free tool that helps you compute this. Enter your details to get a breakdown of your total exercise costs, including state and federal AMT.

How the AMT works is that it builds up in parallel to your regular tax liability, according to a different ruleset. In the end, you pay either the AMT or your regular tax bill — whichever is highest. 

Every year that you file a tax return, you’re required to calculate your regular tax liability as well as your AMT. This is an involved calculation, so it is usually done by the software or accountant that you use to file your taxes.

Why does the AMT exist?

The AMT is a parallel tax system meant as a fallback to prevent excessive tax avoidance.

Back in the 1960s, some Americans got so good at legally not paying taxes that Congress enacted the AMT in 1969. Instead of going through the trouble of fixing the tax code and closing loopholes, federal lawmakers decided that this patch was a better solution.

The vast majority of Americans will never encounter the AMT. Unfortunately for startup employees, one of the factors that drives up your AMT is the exercise of ISO.

While not normally taxed, exercising ISO does increase your AMT. Exercising enough ISO may put your AMT above your regular tax liability, forcing you to pay the additional tax.