AMT and Equity Compensation
Alternative minimum tax, nonqualified stock options, incentive stock options and other forms of equity compensation.
please help - amt bump - sell all or sell somel?
Posted by: jolpot, July 10, 2015 02:29PM
I am married, joint filer, no kids, standard deduction. we rent. Both of us work. This year, after 401k max out, our gross income should be around 225K. Also, we got bonuses around 100K. Taxes for hese amounts have been withed at 25%.

I have ISOs that are fully vested(but not exercised, grant date 2010) to the tune of $332K(10000 shares).

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I am thinking of staying at the company until the year end and spread out the exercise across 2015 and 2016. I will NOT make this kind of money in 2016 and chances are my income will be 0-40% of $225k(plus no more bonuses and isos) and continue to stay so for years to come (early retirement).

So, I am planning to switch jobs soon and scratching my head on how to deal with this -

Looking at the graph for joint filers here, [www.kitces.com]

Clearly, I hit the bump if I exercise the ISOs.

A> Based on the amounts(AGI $325K + 332 = $667K) I have written above, it appears I have to exercise and sell another $167K of stock while holding on to the remaining. Is this a good way of looking at it?

B> should i exercise, sell ~60% and keep the remaining 40% as accelerated income and taking the bitter pill of 35% hump one time?

C>Stay until the end of the year and split my exercises?

D>Should I exercise, pay AMT and wait 1 year before I can sell the entire block or chunks? As i said, our compensation is going to tank since both of us may end up not working.

E>Can I use the situation next year to my advantage, ie early retirement? I will also be a non-resident in 2016.


any ideas appreciated.


I am still unsure how to go about it. I am DIYer normally. But, wont mind paying for professional advice.

Re: please help - amt bump - sell all or sell somel?
Posted by: Kaye Thomas, July 22, 2015 02:21PM
I have performed tax optimization analysis for many individuals with ISOs. Most of my clients have ISO profit in seven or eight figures, which ironically makes their tax planning simpler. We can assume everything is taxed at the maximum rate and know that the model will be close enough to reality to allow us to develop a sound strategy. Clearly a simplified "maximum rate" approach would not be valid for your situation, partly because the ISO profit is not in seven figures (I'm assuming the $332K you refer to is ISO profit) and partly because you anticipate a low-income year. Without actually modeling your situation I can offer the following thoughts.

First, the strategy that optimizes your tax results is not necessarily the most desirable strategy when taking into account other considerations such as investment risk and cash flow. My remarks below address only the issue of tax optimization.

It seems likely that you can exercise a portion of your ISOs in 2015 without incurring AMT. From a tax perspective it will almost surely be advantageous to exercise at least that many shares with the idea of holding them a year and selling them for long-term capital gain in 2016. The sooner you exercise these shares, the sooner the year will be up so you can sell the shares. Of course, delaying the exercise (and the sale) may allow your employment and overall income picture to come into clearer focus.

Most likely this increment will be a small fraction of your overall holding. The best tax strategy for the remainder isn't obvious. Normally we assume that any AMT incurred on exercise of an ISO for shares held after the end of the year will be claimed as a credit only to the extent of capital gains tax incurred on sale of those shares. In that scenario, you aren't actually recovering the tax your previously paid; you're just avoiding the need to pay additional tax. In that situation, your tax cost for exercising the option is simply the amount of AMT you pay in the year of exercise. This may be at least approximately true for you, although it's a bit hard to tell because of uncertainty regarding your future income levels. If so, your main tax planning consideration would be to minimize the AMT cost of exercising your option.

Let's assume we're dealing with $300K in ISO profit after exercising the portion of the option that does not incur AMT. Your income level puts you in the range where the AMT exemption amount is being phased out, so that most of this remaining option profit would be taxed at an effective AMT rate of 35% (not the 28% AMT rate that is nominally the highest rate). A portion of it would be taxed at 28% if your overall income, including this profit, extends beyond the point where the AMT exemption amount is fully phased out (roughly $500,000).

It would appear that you can do better if you exercise most of the option in 2016, assuming your other income will be very low that year. The first $80,000 or so of income is exempt from AMT, and the next $80,000 or so is taxed at 26%. After that, your income puts you in the range where the AMT exemption amount is phased out and you're back to paying about 35%.

The bottom line is that you might save something like $25,000 or more in taxes if you split your exercise between 2015 and 2016. You may be able to sell some of the shares immediately after exercise without incurring additional tax, but to optimize the tax result you would have to hold most of the shares for a year, which means holding some of the shares until 2017. To repeat a point made earlier, this may not be your optimal strategy from other perspectives besides tax planning.

My contact information is available on this website if you want to explore the possibility of retaining my services for this planning.

Kaye Thomas
Fairmark.com

Re: please help - amt bump - sell all or sell somel?
Posted by: jolpot, July 23, 2015 06:50AM
Thank you Kaye. I was confused by the text in the "About the author" page. It clearly said do not contact for tax questions and use the message boards instead.

After I failed to elicit a reply on this board, I did 2 things -
1. resign. I couldnt fathom waiting another 3 months and 2 days. This has forced my hand. I must exercise ALL ISOs.

2. The company stock is on a tear and in an unsustainable pattern (if fed hikes rates, this one is gonna sink like a rock). If I have to exercise it now, I am really worried about holding it for a year though. All is well as long as we have a bull run!

3. I am reading your book, Consider your options and had made the following conclusions.

My net AMT income for 2015 would be greater than 500K, doesn't this put me in the flat 28% slab (based on the fact that AMT bump ends at around $492K for married couple?)

Here is why, what am i missing?
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Regular income is going to be in the ball park of 325-330K (income and bonus taxed at 25%). Last year, AGI was 255K. This year, AGI would be in the $300K range.

AMT income would be regular income + ISO income (todays chart says it is $366k) = $700K

I will ping you on email as well
thanks

Re: please help - amt bump - sell all or sell somel?
Posted by: Kaye Thomas, July 24, 2015 12:59PM
Just a couple of quick points. First, although your bonus is withheld at 25%, that doesn't mean it's taxed at 25%. It appears most of it will be taxed at 33%, so you should be prepared for a shortfall in your withholdings.

Regarding AMT rates, you do indeed push up above the level where the AMT exemption amount is phased out, and when we look at the overall impact of AMT this means your rate is more or less a flat 28% (ignoring the 26% rate that applies to part of your income). For option planning we're interested in the marginal rate, however. Part of your ISO profit falls within the range where the exemption amount is being phased out, and that means part of it is being taxed at 35%.

The question now is what would be the effect of selling some of your stock before the end of the year. In some cases this can be done without any added tax cost, or even with some tax savings, although this would depend on what we can anticipate for 2016.

Kaye Thomas
Fairmark.com



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