If you exercised incentive stock options ISO in the last several years, you may have been hit with a hefty alternative minimum tax AMT bill. The AMT is charged when you exercise your ISO and hold on to your shares and sell them after the calendar year in which they were awarded to you. The AMT is calculated based on the difference between the fair market value FMV of the shares on the date that you exercised the shares and the exercise price. Learn more about the AMT, read Cut Your Alternative Minimum Tax.

While no one is happy about paying tax on a stock transaction, there is a tax law provision — called the AMT credit — that benefits taxpayers. When you pay your AMT bill, that AMT credit is automatically triggered.

That credit can be used to lower your federal income tax bill when the amount you owe on taxes is more than what it would have been under the AMT. That's because, unlike a deduction that lowers the total amount of income on which you are taxed, a credit actually lowers your tax bill dollar-for-dollar.

The provision is a way that Congress helps offset the taxes stockholders incurred for exercising their ISOs. However, many investor-taxpayers found that the AMT credit did not significantly lower their federal income tax bill.

And so Congress instituted tax law changes in , and then amended them again in , to increase the benefits of taxpayer 's unused AMT credits by making them "refundable. How It Works The new tax law changes that took effect in were designed to further help people who exercised their ISOs and had to pay the AMT.

Congress passed changes that were to go into effect between Those changes now deem unused AMT credits that are at least three years old sometimes referred to as "long-term unused AMT credits" as "refundable" by the Internal Revenue Service IRS.

That means that you can claim those credits to:. However, the IRS also put income limits in place to reduce the amount of credit that higher-income earners could claim.

Congress amended the law for by eliminating the income limits and increasing the amount considered refundable. Calculating Your AMT Credit If you have exercised ISOs in the past, you can calculate your potential refundable AMT credit by using the Form worksheet for Form line 45 , talking to a tax filing professional, consulting with an accountant or using the IRS's online AMT Assistant.

Changes implemented in do not limit your credit to the total amount of income tax you owe, meaning that you can claim AMT credits that total more than the amount of money you had withheld for taxes, already paid in quarterly estimated tax or that you owe on your current tax bill. Effective for taxes paid in on earned income , people can claim the greater amount on:.

So far, so good — you've been able to use the refundable credit to pay your federal income tax bill and receive a cash refund.

But the good news doesn't end there. You can collect that remaining credit when you submit your Form for your taxes. While the refundable AMT credit provision is only scheduled to exist for six years , Congress has the ability to extend the provision or make it permanent. Conclusion If you have paid an AMT bill on ISOs that you exercised, be sure to take advantage of the refundable AMT credit provision.

It can go a long way in helping you pay your AMT bill, recoup money you paid out on your AMT bill and pay your federal income tax bills. If you have long-term unused credit from multiple AMT bills paid three or more years ago, you may want to work with a professional tax preparer or tax attorney to ensure that you're correctly filing your claims and maximizing your benefits.

If tax rules are confusing to you, take a look at Making Sense Of The Tax Code to find ways to help you understand it. Dictionary Term Of The Day.

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Cut Employee Stock Option Taxes With AMT Credit By Katie Adams Share. That means that you can claim those credits to: Effective for taxes paid in on earned income , people can claim the greater amount on: Getting rid of the AMT would be great for upper-middle class taxpayers.

Options and restricted stock are a great perk--if you don't get caught in a tax trap.

Tax Topics - Topic Stock Options

Here's what you need to know. That depends on the type of stock option you have. A rundown of the tax treatment for statutory and nonstatutory, or non-qualified, options. Here are a few of the credits that may result in a refund check, even if you owe no taxes this year.

From grouping related expenses to factoring in the alternative minimum tax, here are some things you need to keep in mind when doing tax planning. Getting organized well before the deadline will curb your frustration and your tax liability. By the end of filling it out, you'll know how much tax you owe, or what your refund is.

Incentive Stock Options - TurboTax Tax Tips & Videos

A tax pro answers questions she hears most often and quashes some myths. Don't miss out on these tax credits if you have recently graduated.

A refund can represent a lost opportunity cost for things you could have done in the past. Learn about the instances in which the IRS can levy your federal and state income tax refunds, and find out how the levy An expense ratio is determined through an annual A hybrid of debt and equity financing that is typically used to finance the expansion of existing companies.

A period of time in which all factors of production and costs are variable. In the long run, firms are able to adjust all A legal agreement created by the courts between two parties who did not have a previous obligation to each other.

A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. A statistical technique used to measure and quantify the level of financial risk within a firm or investment portfolio over No thanks, I prefer not making money.

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