Escaping AMT in the year of stock option exercise?

August 20, 2013
I am planning to exercise some of my options this year. What tax planning steps can I take prior to exercise to prevent a huge AMT bill? I've heard some horror stories (e.g. Zynga). and want to avoid if possible.

Advisor answers

As always carefully read Lyman's answer. I would add that you can put aside the tax question and choose to do a cashless exercise (selling enough stock upon exercise to cover cost of stock plus tax liability-usually about 65% of the option allocation) and take your chances on the remaining 35% understanding if the stock is a home run you will participate only partially. In addition if you have more than one grant you can mange exercise around the rest of your finances. Think incrementally as in you do not have to do ...

For those who don't already know, the alternative minimum tax (AMT) is a parallel tax system, and involves calculating income taxes with the inclusion of certain types of income that would not be included in the “normal” tax calculation, and the exclusion of certain types of itemized deductions that would normally be included in the “normal” tax calculation. These are called “preference” items.

This is where exercising stock options can become a difficulty for people who may be subject to AMT. The bargain element (the difference...