Five years after the ISO grant, Katie's AMT income adjustment from exercising is $74,000. What is the amount?

Five years after the ISO grant, Katie's AMT income adjustment from exercising is $74,000. What is the amount?

• A. Katie will not have any AMT income adjustment.
• B. Katie will have an AMT income adjustment of $74,000.
• C. Katie will have an AMT income adjustment of $60,000.
• D. Katie will have an AMT income adjustment of $134,000.

Answer: (B)

The key idea is how ISOs interact with the Alternative Minimum Tax. When you exercise incentive stock options, the bargain element—the difference between the fair market value at exercise and the strike price—is added to your AMT income in the year of exercise. This AMT adjustment is separate from regular tax and can trigger AMT based on the exercise year, regardless of what happens later with the stock. Here, the AMT income adjustment from exercising is given as 74,000. That figure represents the bargain element at the time of exercise, so the AMT adjustment is $74,000. The fact that the grant was five years ago affects regular tax treatment if you later sell (holding period rules for ISOs), but it does not change the amount of the AMT adjustment in the exercise year.

The key idea is how ISOs interact with the Alternative Minimum Tax. When you exercise incentive stock options, the bargain element—the difference between the fair market value at exercise and the strike price—is added to your AMT income in the year of exercise. This AMT adjustment is separate from regular tax and can trigger AMT based on the exercise year, regardless of what happens later with the stock.

Here, the AMT income adjustment from exercising is given as 74,000. That figure represents the bargain element at the time of exercise, so the AMT adjustment is $74,000. The fact that the grant was five years ago affects regular tax treatment if you later sell (holding period rules for ISOs), but it does not change the amount of the AMT adjustment in the exercise year.