Hi, I’m Tom Lo with Vested Financial Planning. I’m here to help answer the question: Why does exercising your ISOs often lead to AMT? The reason why is because AMT treats different types of income differently. When you exercise your ISOs, the difference between your strike price and the fair market value doesn’t count as income for ordinary income purposes, but it does count as income for AMT purposes.
Now, the good news is when you pay AMT, you get what’s called an AMT credit. AMT credit means that you have this credit. You can use it in future tax years whenever your ordinary income is higher than your AMT. That difference can be paid by the AMT credit and you can keep that credit for as long as you want until you use it up.
If you want to learn more, come to my website at vestedfinancialplanning.com. Thank you very much.