ISO taxes and AMT [Incentive Stock Option]

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ilala
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ISO taxes and AMT [Incentive Stock Option]

Post by ilala » Fri Sep 28, 2018 5:08 pm

Hi! I am a real newbie here.
Recently, I bought 39K in ISO and I can not sell it until next March 2019. The current market value is around 200k. So my profit should be around 160k.
I make 170k per year and I am married. My wife does not work she is a student. What should I do to reduce the AMT?

mountains
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Re: ISO taxes and AMT

Post by mountains » Fri Sep 28, 2018 7:17 pm

If you've already exercised your options, you've already incurred your tax liability so there isn't much you can do. If the AMT this year pushes you into a higher marginal tax bracket it might be worth to consider pulling in planned deductions (that are deductible for AMT) for next year into this year. The silver lining is that the AMT paid for ISO exercise is potentially refundable in future years (search for AMT tax credit).

In terms of selling the stock that you bought with your exercise. Keep in mind that in order for the gains to be treated as LTCG you must have held the stock for 1 year (i.e., one year since exercise date) and it must have been 2 years since the options where granted.

I'd recommend for you to look for a tax advisor who has experience in ISOs and their tax consequences.

(This is not tax advise)

crit
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Re: ISO taxes and AMT

Post by crit » Fri Sep 28, 2018 9:44 pm

First, I'd use either last year's TurboTax or the IRS worksheets to determine whether you will owe the AMT at all. $330k joint.... my gut says you won't.

If you go back in my own posting history, i had a similar question earlier this summer, and someone kindly pointed me towards the right worksheets.

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FiveK
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Re: ISO taxes and AMT

Post by FiveK » Sat Sep 29, 2018 9:42 am

The AMT for 2018 is significantly different from the 2017 version, with a lower AMT amount in 2018.

With $170K of regular income and $330K of AMT income, however, you will be hit by AMT for 2018.

A quick look using the personal finance toolbox spreadsheet returns $33,947 in AMT, plus $23,999 on the $170K, for a total of $57,946.

ilala
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Re: ISO taxes and AMT

Post by ilala » Thu Oct 04, 2018 10:45 pm

FiveK wrote:
Sat Sep 29, 2018 9:42 am
The AMT for 2018 is significantly different from the 2017 version, with a lower AMT amount in 2018.

With $170K of regular income and $330K of AMT income, however, you will be hit by AMT for 2018.

A quick look using the personal finance toolbox spreadsheet returns $33,947 in AMT, plus $23,999 on the $170K, for a total of $57,946.
so I should pay 57k in taxes?

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FiveK
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Re: ISO taxes and AMT

Post by FiveK » Thu Oct 04, 2018 10:51 pm

ilala wrote:
Thu Oct 04, 2018 10:45 pm
FiveK wrote:
Sat Sep 29, 2018 9:42 am
The AMT for 2018 is significantly different from the 2017 version, with a lower AMT amount in 2018.

With $170K of regular income and $330K of AMT income, however, you will be hit by AMT for 2018.

A quick look using the personal finance toolbox spreadsheet returns $33,947 in AMT, plus $23,999 on the $170K, for a total of $57,946.
so I should pay 57k in taxes?
If that is your only income, you have no deductions, etc., then your total federal income tax for 2018 will be ~$58K. How much you might want to pay in estimated tax depends on how much you are withholding.

In other words, what you "should" do may depend on many pieces of information not available in this thread.

ilala
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Re: ISO taxes and AMT

Post by ilala » Sat Oct 06, 2018 1:21 pm

Should I do an IRA to Roth IRA conversion? I have a 401k and I am maxing it out. This should decrease my income?
However I would like to understand how did you compute 330k AMT income? @FiveK The profit would be 160k.

MotoTrojan
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Re: ISO taxes and AMT

Post by MotoTrojan » Sat Oct 06, 2018 1:29 pm

ilala wrote:
Sat Oct 06, 2018 1:21 pm
Should I do an IRA to Roth IRA conversion? I have a 401k and I am maxing it out. This should decrease my income?
However I would like to understand how did you compute 330k AMT income? @FiveK The profit would be 160k.
Not sure why that conversion would have any reduction in income...? You’d actually pay more taxes.

MotoTrojan
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Re: ISO taxes and AMT

Post by MotoTrojan » Sat Oct 06, 2018 1:32 pm

The market value when you exercised is all that matters for AMT. What was it relative to the $39K? If the grant was 2 years old and held for a year the gains since exercise just see longterm capital gains, no AMT.

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FiveK
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Re: ISO taxes and AMT

Post by FiveK » Sat Oct 06, 2018 1:55 pm

ilala wrote:
Sat Oct 06, 2018 1:21 pm
However I would like to understand how did you compute 330k AMT income? @FiveK The profit would be 160k.
I understood your OP to mean you paid ~$40K for ISO shares worth $200K, giving you an ISO income for AMT purposes of $160K.

See Line 14—Exercise of Incentive Stock Options in https://www.irs.gov/pub/irs-pdf/i6251.pdf.

Add the $170K in ordinary income to that $160K for a total of $330K.

ilala
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Re: ISO taxes and AMT

Post by ilala » Sat Oct 13, 2018 12:31 pm

MotoTrojan wrote:
Sat Oct 06, 2018 1:32 pm
The market value when you exercised is all that matters for AMT. What was it relative to the $39K? If the grant was 2 years old and held for a year the gains since exercise just see longterm capital gains, no AMT.
The grant has a date of 12/1/2017. It is not two years old. I am trying to understand how I can avoid to pay a big tax bill for it. I have seen that even if you keep and you don't sell the shares I should still owe the AMT for that 160k capital gain.

@FiveK thank you for the calculation. How can I calculate the withholding to decrease from 58k? I am maxing out my 401k.

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FiveK
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Re: ISO taxes and AMT

Post by FiveK » Sat Oct 13, 2018 12:53 pm

ilala wrote:
Sat Oct 13, 2018 12:31 pm
@FiveK thank you for the calculation. How can I calculate the withholding to decrease from 58k? I am maxing out my 401k.
Sorry but I don't understand the question, at least not beyond the answer suggested in viewtopic.php?p=4164009#p4149793.

Have you tried that spreadsheet or other tool that will give you a 2018 tax estimation, including AMT?

MotoTrojan
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Re: ISO taxes and AMT

Post by MotoTrojan » Sat Oct 13, 2018 3:56 pm

ilala wrote:
Sat Oct 13, 2018 12:31 pm
MotoTrojan wrote:
Sat Oct 06, 2018 1:32 pm
The market value when you exercised is all that matters for AMT. What was it relative to the $39K? If the grant was 2 years old and held for a year the gains since exercise just see longterm capital gains, no AMT.
The grant has a date of 12/1/2017. It is not two years old. I am trying to understand how I can avoid to pay a big tax bill for it. I have seen that even if you keep and you don't sell the shares I should still owe the AMT for that 160k capital gain.

@FiveK thank you for the calculation. How can I calculate the withholding to decrease from 58k? I am maxing out my 401k.
You can get the AMT related taxes back via a tax-credit but it could take a long time depending on your income in future years. In order to pay LTCG on the spread you have to have held the shares for 1 year and the grant be 2 years old. May want to see a tax professional with these dollar amounts.

ilala
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Re: ISO taxes and AMT [Incentive Stock Option]

Post by ilala » Sun Oct 14, 2018 12:15 am

Thank you, guys! I will try to contact a tax professional. Do you have any advice in San Francisco?

ilala
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Re: ISO taxes and AMT

Post by ilala » Sun Oct 14, 2018 12:17 am

FiveK wrote:
Sat Oct 13, 2018 12:53 pm
ilala wrote:
Sat Oct 13, 2018 12:31 pm
@FiveK thank you for the calculation. How can I calculate the withholding to decrease from 58k? I am maxing out my 401k.
Sorry but I don't understand the question, at least not beyond the answer suggested in viewtopic.php?p=4164009#p4149793.

Have you tried that spreadsheet or other tool that will give you a 2018 tax estimation, including AMT?
Let me rephrase: If I contribute at the maximum my 401k this should decrease my income from 170k or it does not help? Is this the tool that you are referring to https://drive.google.com/file/d/1Kxk0_A ... YQIa2/view?

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FiveK
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Re: ISO taxes and AMT

Post by FiveK » Sun Oct 14, 2018 12:30 am

ilala wrote:
Sun Oct 14, 2018 12:17 am
FiveK wrote:
Sat Oct 13, 2018 12:53 pm
ilala wrote:
Sat Oct 13, 2018 12:31 pm
@FiveK thank you for the calculation. How can I calculate the withholding to decrease from 58k? I am maxing out my 401k.
Sorry but I don't understand the question, at least not beyond the answer suggested in viewtopic.php?p=4164009#p4149793.

Have you tried that spreadsheet or other tool that will give you a 2018 tax estimation, including AMT?
Let me rephrase: If I contribute at the maximum my 401k this should decrease my income from 170k or it does not help? Is this the tool that you are referring to https://drive.google.com/file/d/1Kxk0_A ... YQIa2/view?
Yes a 401k contribution will decrease your taxable income.

Yes, that is the tool. It works best if you download it as an Excel file.

ilala
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Re: ISO taxes and AMT [Incentive Stock Option]

Post by ilala » Wed Oct 17, 2018 11:58 am

Thank you very much for all your help!
Do you think that converting from my IRA 5500$ to a ROTH IRA so using the back door would make sense or would increase the amount of taxes that I owe?

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FiveK
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Re: ISO taxes and AMT [Incentive Stock Option]

Post by FiveK » Wed Oct 17, 2018 12:22 pm

ilala wrote:
Wed Oct 17, 2018 11:58 am
Thank you very much for all your help!
Do you think that converting from my IRA 5500$ to a ROTH IRA so using the back door would make sense or would increase the amount of taxes that I owe?
If the $5500 is a post-tax amount, and you have no other pre-tax money in any IRA, then a Backdoor Roth IRA will not incur any tax (or perhaps a few dollars, if there have been some minimal gains between contribution and conversion).

But if you are talking about a conversion of pre-tax traditional IRA money to a Roth IRA, that is fully taxable.

ilala
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Re: ISO taxes and AMT [Incentive Stock Option]

Post by ilala » Thu Oct 18, 2018 1:19 am

In my IRA there are only contributions from my ex-employer and a 401k rollover from another ex-employer. So I guess if I rollover 5500$ from my IRA this will be fully taxable and I don't know if it is worth doing it. Should I contribute 5500$ in my IRA with post-tax money and after making the rollover to the ROTH-IRA to avoid to pay taxes?

https://www.cbsnews.com/news/irs-allows ... s-in-2018/
The income range for making contributions to a Roth type IRA in 2018 is $120,000 to $135,00 (singles and head of household) and $189,000 to $199,000 (marrieds).
It looks like that I should be able to contribute to the ROTH IRA without the backdoor right and pre-tax money right?

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FiveK
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Re: ISO taxes and AMT [Incentive Stock Option]

Post by FiveK » Thu Oct 18, 2018 4:08 am

ilala wrote:
Thu Oct 18, 2018 1:19 am
In my IRA there are only contributions from my ex-employer and a 401k rollover from another ex-employer. So I guess if I rollover 5500$ from my IRA this will be fully taxable and I don't know if it is worth doing it. Should I contribute 5500$ in my IRA with post-tax money and after making the rollover to the ROTH-IRA to avoid to pay taxes?
No. See below.
https://www.cbsnews.com/news/irs-allows ... s-in-2018/
The income range for making contributions to a Roth type IRA in 2018 is $120,000 to $135,00 (singles and head of household) and $189,000 to $199,000 (marrieds).
It looks like that I should be able to contribute to the ROTH IRA without the backdoor right and pre-tax money right?
Without the backdoor, yes. Pre-tax money, no.

A deductible traditional IRA (tIRA) gets funded with pre-tax money. You make too much to deduct tIRA contributions. A Roth IRA is always funded with post-tax contributions.

See Traditional versus Roth - Bogleheads.

ilala
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Re: ISO taxes and AMT [Incentive Stock Option]

Post by ilala » Sun Oct 21, 2018 7:14 pm

You are super helpful guys!
I have just one question: if you make 170k and your company pays bonuses and I received 24k in bonuses so far this will make my income 194k or the relevant part is only my base salary?
I think that I can not contribute to the ROTH IRA https://www.irs.gov/retirement-plans/pl ... e-for-2018 or maybe I could contribute a reduced amount that I don't know how to calculate.

Is there any post regarding creating a good portfolio over here?

Thank you very much
I really appreciate your efforts and I will start to study more and more about it.
Last edited by ilala on Sun Oct 21, 2018 9:54 pm, edited 1 time in total.

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FiveK
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Re: ISO taxes and AMT [Incentive Stock Option]

Post by FiveK » Sun Oct 21, 2018 8:30 pm

ilala wrote:
Sun Oct 21, 2018 7:14 pm
You are super helpful guys!
I have just one question: if you make 170k and your company pays bonuses and I received 24k in bonuses so far this will make my income 194k or the relevant part is only my base salary?
$194K. The IRS does not ignore bonuses. ;)
I think that it would make sense to contribute to a ROTH IRA to 5500$ without the backdoor. I have seen that my company allows contributing to 401k and Roth IRA. I need to check if the ROTH IRA is a pre-tax or post-tax contribution in order to maximize it.
Your company runs the 401k. What you do with an IRA is up to you, not your company. Roth (note, it's a name not an acronym) IRAs are post-tax.
Would it be better pre-tax than post-tax contribution?
Given your income, deducting pre-tax would likely be better. But also given your income, you can't deduct IRA contributions so Roth it is for IRA - you can still do pre-tax 401k.
Is there any post regarding creating a good portfolio over here?
Many. :)

Start with Getting started - Bogleheads. See also the 'Basic Terms' tab of the personal finance toolbox spreadsheet.

ausmatt
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Re: ISO taxes and AMT [Incentive Stock Option]

Post by ausmatt » Sun Oct 21, 2018 8:49 pm

Is it a public company?

If not, take a look at 83(I) elections. I also recommend you read as much as possible as even CPAs are not great at ISOs (especially private company ones). There’s a paid site called mystockoptions.com that is surprisingly good. (I used it for a month and just downloaded all their articles).

ilala
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Re: ISO taxes and AMT [Incentive Stock Option]

Post by ilala » Mon Oct 22, 2018 12:26 pm

Thank you, everyone!

I got in touch with a CPA and he told me that I would be able to put 5500$ in ROTH because he calculates 194k (income) - 18500$ (401k) = 175500$ and this is lower the IRS bar.

https://www.irs.gov/retirement-plans/pl ... e-for-2018

I hope that he gave me the right instructions I also got in touch with lawyers and everyone was telling me something different.

ilala
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Re: ISO taxes and AMT [Incentive Stock Option]

Post by ilala » Mon Oct 22, 2018 12:27 pm

ausmatt wrote:
Sun Oct 21, 2018 8:49 pm
Is it a public company?

If not, take a look at 83(I) elections. I also recommend you read as much as possible as even CPAs are not great at ISOs (especially private company ones). There’s a paid site called mystockoptions.com that is surprisingly good. (I used it for a month and just downloaded all their articles).
I bought the stocks for a new public company. Thank you very much for the reference!

ilala
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Re: ISO taxes and AMT [Incentive Stock Option]

Post by ilala » Sat Nov 03, 2018 7:01 pm

I asked a professional tax CPA and he told me that THE MAGI is calculated as 194000 - 18500 (401k contribution) = 175500
In the end, the profit from stocks does not contribute to the MAGI and so I can contribute 5500$ to my IRA since we are going to file jointly.
Now the question is: Is it really good to put money on the ROTH IRA? https://www.rothira.com/how-to-open-a-roth-ira#eligible
He also adviced me to keep the stock for more than 1 year to receive tax credit on the next year :) So the money that I use to pay my AMT tax bill could come back the following year :)

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