Avoid the AMT Liability by Increasing the Regular Tax Liability

Hi everyone. My name is Tan and I am an independent Certified Financial Planner Practitioner at TAN Wealth Management. In today’s educational video, I want to share with you how we could avoid AMT liability by increasing our regular tax liability.

For example, Luna Phan is single and she is a California resident.
The Federal’s standard deduction is $12,950.
The California's standard deduction for state income taxes is $5,202.
This is our baseline for the following scenarios in this video.

Scenario 1
Salary of $100,000
Federal AMT liability is $0
Total Federal Tax is $14,768
California AMT liability is $0
Total California Tax is $5,430

Scenario 2
Salary of $100,000
Bargain element of $300,000
Federal AMT liability is $71,858
Total Federal Tax is $86,626
California AMT liability is $17,963
Total California Tax is $23,393

What did we learn from scenario 1 and scenario 2?
● The total federal tax includes the regular federal tax liability and the federal AMT liability. From scenario 2, the total federal tax of $86,626 minus the federal AMT liability of $71,858 equals $14,768.
● The total California tax includes the regular California tax liability and the California AMT liability. From scenario 2, the total California tax of $23,393 minus the California AMT liability of $17,963 equals $5,430.
● If we want to know what the regular tax liability is, we subtract the total tax from the AMT liability.

Scenario 3
Salary of $500,000
Bargain element of $300,000
Federal AMT liability is $72,613
Total Federal Tax is $219,533
California AMT liability is $10,784
Total California Tax is $56,000

Scenario 4
Salary of $1,000,000
Bargain element of $300,000
Federal AMT liability is $31,715
Total Federal Tax is $367,078
California AMT liability is $0
Total California Tax is $104,891

Scenario 5
Salary of $1,500,000
Bargain element of $300,000
Federal AMT liability is $0
Total Federal Tax is $524,864
California AMT liability is $0
Total California Tax is $171,339

As we can see, the higher our salary, the higher the bargain element we can have before we are subject to AMT liability. When we compare scenario 3 with scenario 5, both scenarios have a bargain element of $300,000, but scenario 5 is not subject to AMT liability because of the higher salary. Pro-tip, don’t increase our regular tax liability to avoid AMT liability because we are paying more in taxes by realizing more income. Thus, have a plan and run different scenarios to find the lowest net cost when exercising incentive stock options (ISOs).

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.