Higher Bargain Element = Higher AMT Liability
Hi everyone. My name is Tan and I am an independent Certified Financial Planner Practitioner at TAN Wealth Management. This video and the following videos are designed for those that want to learn and understand the relationship between incentive stock options, regular tax liability, AMT liability, and AMT credits so they can make an informed decision on how to optimize their incentive stock options. What better way to learn the materials than doing examples because we learn more by doing. We are going to start with the basics in this video and then increase the complexity in the following videos.
In today’s educational video, I want to show you that the higher the bargain element, the higher the AMT liability. This will give you a sense of what the AMT liabilities will be like as we increase the bargain element.
For example, Ace is single and he is a California resident.
The Federal’s standard deduction is $12,950.
The California's standard deduction for state income taxes is $5,202.
His salary is $250,000
This is our baseline for the following scenarios in this video.
Scenario 8
Bargain element of $0
Max before AMT is $43,196
Federal AMT liability is $0
California AMT liability is $0
Total Federal Tax is $57,171
Total California Tax is $19,434
Scenario 9
Let’s add $1 to the max before AMT of $43,196 and make that the bargain element which is $43,197.
Bargain element of $43,197
Federal AMT liability is $1
California AMT liability is $0
Total Federal Tax is $57,171
Total California Tax is $19,434
By adding $1 over the max before AMT amount, we now have an AMT liability.
Scenario 10
Bargain element of $200,000
Federal AMT liability is $43,906
California AMT liability is $8,388
Total Federal Tax is $101,076
Total California Tax is $27,822
Scenario 11
Bargain element of $500,000
Federal AMT liability is $142,613
California AMT liability is $32,980
Total Federal Tax is $199,783
Total California Tax is $52,414
Scenario 12
Bargain element of $1,000,000
Federal AMT liability is $289,158
California AMT liability is $67,980
Total Federal Tax is $346,328
Total California Tax is $87,414
Scenario 13
Bargain element of $3,000,000
Federal AMT liability is $849,158
California AMT liability is $207,980
Total Federal Tax is $906,328
Total California Tax is $227,414
Scenario 14
Bargain element of $5,000,000
Federal AMT liability is $1,409,158
California AMT liability is $347,980
Total Federal Tax is $1,466,328
Total California Tax is $367,414
What did we learn from scenarios 8 to 14?
The higher the bargain element, the higher the AMT liability. This video is just a warm-up and the following videos will be more complex and technical.
Please note that this material is for educational use only and it’s subject to change. Tax laws are complex, there are exceptions to the rules, and it’s constantly changing. Be sure to talk to a qualified professional before making an informed decision. Thank you for watching. Until next time. This is Tan, your Trusted Advisor.