Holloway Guide ToEquity Compensation
Common questions covered here
What are the AMT consequences of early exercise?
Does the AMT apply to NSOs?
How does the AMT work?
Show 2 more

The AMT Trap

When it comes to taxes and equity compensation, one scenario is so dangerous we give it its own section.

danger If you have received an ISO, exercising it may unexpectedly trigger a big AMT bill—even before you actually make any money on a sale! If there is a large spread between the strike price and the 409A valuation, you are potentially on the hook for an enormous tax bill, even if you can’t sell the stock. This has pushed people into bankruptcy. It also caused Congress to grant a one-time forgiveness, the odds of which happening again are very low.

Definition The catastrophic scenario where exercising ISOs triggers a large AMT bill, with no ability to sell the stock to pay taxes, is sometimes called the AMT trap. This infamous problem has trapped many employees and bankrupted people during past dot-com busts. Now more people know about it, but it’s still a significant obstacle to plan around.

new In 2017, Congress passed the Tax Cuts and Jobs Act (TCJA), which increases AMT exemptions and their phaseout thresholds. This means fewer people will be affected by AMT in 2018 than in prior years.*

Note that if your AMT applies to events prior to 2008, you’re off the hook.

Understand this topic and talk to a professional if you exercise ISOs. The AMT trap does not apply to NSOs.

If you found this post worthwhile, please share!
Log in to read this whole book for free.
This page is one small part of a much larger book.