AMT and Equity Compensation
Alternative minimum tax, nonqualified stock options, incentive stock options and other forms of equity compensation.
Can AMT Credit (ISOs) offset NIIT?
Posted by: falsefaith, February 8, 2017 08:11PM
I'm planning on exercising (and holding) some ISOs later this year and will have an AMT credit for use in future years. I'd like to plan for how much of a credit I'd like to carry over based on selling it (for hopefully more money) a year+ later. I can't seem to find anywhere if the AMT credit is applicable to offset Net Investment Income Tax in the year I sell the shares (or any other future time in which I have NIIT regardless of whether my TMT is higher than my regular income tax).

Thanks in advance!

Re: Can AMT Credit (ISOs) offset NIIT?
Posted by: ruth, February 8, 2017 09:59PM
The AMT credit doesn't offset the NIT. The AMT credit offsets the tax from the tables, etc plus the excess advance premium repayment credit reduced by all nonrefundable credits other than the AMT credit and credit to holders of tax credit bonds.

Re: Can AMT Credit (ISOs) offset NIIT?
Posted by: Kaye Thomas, February 11, 2017 09:05PM
In your planning you should be aware that NIIT applies to capital gain from selling ISO shares that were held, but does not apply to the compensation income reported in a disqualifying disposition. Because of the way the AMT limits your tax benefit from holding shares (and because of the fact that the AMT credit doesn't offset NIIT), you can actually end up paying a greater total amount of tax when you hold more than the optimal number of shares. To say this another way, you can actually reduce your overall tax by making a partial disqualifying disposition. Determining the optimal number of shares to hold is quite complicated, but the exercise can pay off in reducing both taxes and exposure to investment risk.

Kaye Thomas

Re: Can AMT Credit (ISOs) offset NIIT?
Posted by: falsefaith, February 20, 2017 10:19PM
That's very helpful. I can see how a partial disqualifying disposition could increase my post-tax returns in the year in which I exercise. However, if I feel confident (or I just want to take the risk) that the value of the company will double or triple in the years to come I would still be better served holding all the shares and dealing with a large AMT credit than making the partial disqualifying disposition correct?

Thanks again!

Re: Can AMT Credit (ISOs) offset NIIT?
Posted by: Kaye Thomas, February 22, 2017 01:41AM
Based on current law, you could still be better off if you sold the "excess" shares in a disqualifying disposition and repurchased them immediately afterward. I would never recommend that strategy, but I believe you come out ahead (compared to simply holding the shares) provided your transaction costs are less than the amount of NIIT you save.

Kaye Thomas

Re: Can AMT Credit (ISOs) offset NIIT?
Posted by: dp70, May 11, 2017 10:49PM
Can the AMT credit (from excising the ISOs) be used against capital gains from a qualifying disposition. (I am assuming not, from your comment on NIIT- but just confirming). Also, where can I find more information on the optimal number of shares to hold. Does the book 'consider your options' shed any light on this? Thank you in advance!

Re: Can AMT Credit (ISOs) offset NIIT?
Posted by: Kaye Thomas, May 14, 2017 04:26PM
When you make a qualifying disposition of ISO stock, the shares normally have higher basis for AMT purposes than for regular income tax purposes. As a result, you normally have smaller capital gain on the sale under the AMT system, and this usually allows you to claim credit for at least a portion of the AMT paid for the year you exercised the option. However, if the shares appreciate further after you exercise the option, this additional capital gain goes into both the AMT calculation and the regular income tax calculation. Usually there is no AMT credit recovery against this increment of capital gain.

My book, Consider Your Options, includes a chapter on ISO strategies, with a discussion of how to optimize the number of shares to hold. It does not lay out details on how to perform the calculation, because that depends on a great many individual factors, but it would point you in the right direction. Note that the current administration and Congress are considering tax proposals that could alter the calculations, or perhaps even change the entire approach.

Kaye Thomas

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