In this article we’ll share answers to questions that come up constantly in these sessions (you’re not alone!). If there’s anything you’d like more clarity on, join us for 1:1 Equity Tax Planning Session. You can sign up here.
In this article we’ll cover:
What is the Alternative Minimum Tax (AMT)?
AMT is a term that you’ll hear often when thinking about exercising your options. There’s a lot to unpack.
The Alternative Minimum Tax is another method for individual tax calculation that was put into place to make sure that taxpayers couldn’t claim deductions that would bring their effective tax rate below a “minimum” level.
AMT is an important consideration if you have significant value in ISO equity stock options.
The spread between the value of your ISOs at exercise and their value at grant is not applied to your standard income calculation, but that value does factor into AMT.
Since ISO stock options don’t generate cash until they’re sold, you can end up with a large tax bill from the exercise of your options without the cash to cover the tax obligation. It’s not a fun proposition to think about.
Next Steps: If you want to explore AMT in detail, we have more resources for you!
- For more details about AMT specifically, you can explore our article here.
- If you have Incentive Stock Options (ISOs) and want to learn more about their taxation (including AMT), you can explore more here.
- Or if you are ready to speak with an expert about your situation, consider having a 1:1 Equity Tax Planning Session. An advisor will run through different scenarios with you and help you determine how to minimize AMT.
How is my equity taxed if I lived in different states?
Spending time in different states over the years could definitely affect your tax liability. There are two main factors in play when determining residency for tax purposes: domicile and statutory residency.
Domicile is a fancy word for your home. You can only have one home for tax purposes — it’s where you intend to live. Your domicile is your home state for income tax purposes.
Statutory can be a second location outside of your home. Every state has a certain criteria that, if met, will consider you a statutory resident. If you are a statutory resident of a state, you may have tax obligations in that state in addition to your domicile state.
So while it varies by state, here’s the long and short of it: If you’ve lived in different states while earning equity, your taxes will likely be impacted.
Should I be paying estimated taxes?
It’s a good question, especially with how popular buying and selling crypto has become.
In short, if you generated income throughout the year and taxes were not withheld, you likely should be paying estimated taxes. For instance, if you sold crypto or equity shares and didn’t pay taxes at the time of the transactions, estimated taxes may be owed. And if you don’t pay them, interest and penalties can accrue.
If you exercise & sell options from your current employer, tax withholdings will likely be made for you (always double-check to be safe).
On the other hand, if you’re selling shares or other equity from prior employers you may be responsible for estimated payments. There are lots of factors to consider.
- If you’d like to dive a little deeper into the world of quarterly tax payments, this article covers it all.
- If you still have questions, a 1:1 Equity Tax Planning Session can determine whether estimated payments are necessary or if “safe harbor” may apply.
Does Qualified Small Business Stock (QSBS) apply to my equity?
It might, but your equity would need to satisfy several conditions. Some employee and founder stock is considered Qualified Small Business Stock, if it’s held:
- as stock
- for 5+ years
- in specific types of companies
- stock received before the company has $50 million in assets
You can read more about Qualified Small Business Stock in this article.
If you answer yes to all of the above, then you can receive an exemption from federal taxes on gains of up to 50x the cost basis or $10 million, whichever is greater. State level income tax is also excluded in some states.
Next Steps: We can tell you if your equity qualifies for this status in a 1:1 Equity Tax Planning Session. We can cover anything else that relates to your equity, for that matter. Sign up for a session by creating an account here. You can also access Harness tools, like our equity dashboard and tax calculator.