By |Published On: Apr 29, 2024|Categories: Alternative Minimum Tax, Financial Planning, ISOs|

Today we are going to go on a kayaking journey together on one of the “most prettiest” rivers in all of the land – the Delaware River. It has clean water, fun rapids, and if you’re lucky, you might spot a bald eagle! During our trip together, we will take in nature, get some exercise, and better understand the Alternative Minimum Tax (AMT) Threshold with ISOs.

AMT Explained

On our trip down the Delaware, we want to be wary of any rocks – the AMT – that we may bump into. As long as the water is high enough to cover the boulders we won’t bump into them. We won’t have to pay the AMT.

The river water level is high when there was a lot of snow over the winter and there’s been a thorough thaw. That is, your taxes from the ordinary income system cover the rocks. When this happens, you don’t pay AMT.

However, if it was a dry winter and there wasn’t a lot of rain in the spring, the water level will be low and the rocks will stick out. So when you aren’t paying enough in taxes (low water level) in the ordinary income system, you will pay the AMT when the rocks are jutting out of the water.

Take Advantage of ISOs in a High Level Year – AMT Threshold with ISOs

As discussed, there are 2 different tax systems – the regular tax code – the water, and the AMT – the rocks.

In the years when you are paying a lot of dollars under the regular tax code, and this amount is above the AMT, you can “throw in” some AMT items and essentially get them for free.

One of these AMT items is exercising ISOs. Please see the table below for the illustration:

Regular (Water)AMT Threshold (Rock)
Regular Tax$117,500$117,500
6251 Adjustment$0$20,900
Tentative Minimum Tax$110,500$117,501
Total Tax$117,500$117,501

First is the Regular example on the left hand part of the table. You can see the regular tax is higher than the tentative minimum tax. When this is the case, no AMT is owed.

Next is the AMT Threshold example on the right side of the table. We assume the same income and same tax under the regular tax code. However, in this scenario, we can exercise $20,900 of ISOs (6251 Adjustment) and bump into the AMT by $1.

This amount is for illustrative purposes. To save the $1 in AMT we would only exercise $20,899 of ISOs (the AMT Threshold with ISOs) to pay $117,500 in tax.

So in this example, with a bit of planning, you can take on more company ownership while still paying the same amount in tax dollars.

Getting Ready for Spring Kayaking Season

As you prep your kayak for your spring adventures, watch out for the rocks! If the water level is high enough you can forgo them and perhaps use it to your advantage.

Interested in chatting more about kayaks, river adventures, and/or your finances?