How to Explain AMT and Withholding Gaps to Clients
Simple visuals and analogies for complex concepts (and fewer April surprises).
Last updated: January 2026
Explaining AMT: the “two tax returns” analogy
Think of it like having two tax calculators. Calculator #1 is the regular tax system you’re used to. Calculator #2 is the AMT system — it ignores some deductions and taxes certain “paper gains” that regular tax ignores.
When you exercise ISOs and keep the shares, regular tax says “no tax yet — you didn’t sell.” But AMT counts that spread as income. You pay whichever calculator is higher.
When you exercise ISOs and keep the shares, regular tax says “no tax yet — you didn’t sell.” But AMT counts that spread as income. You pay whichever calculator is higher.
Visual: Regular tax vs. AMT
| Item | Regular tax | AMT |
|---|---|---|
| Salary & wages | Included | Included |
| RSU vesting income | Included | Included |
| NSO exercise spread | Included | Included |
| ISO exercise spread | Not included | INCLUDED |
| State/local tax deduction | Deductible (capped) | Not deductible |
| You pay | Higher of the two | Higher of the two |
Explaining withholding gaps: the “parking meter” analogy
Imagine you need to park for 3 hours, but your employer only puts 2 hours of coins in the meter. That’s what happens with RSU withholding.
Your company may withhold 22% for federal taxes because that’s the standard bonus/stock rate — but if you’re in the 35% bracket, you’re short 13% on every dollar.
Your company may withhold 22% for federal taxes because that’s the standard bonus/stock rate — but if you’re in the 35% bracket, you’re short 13% on every dollar.
Visual: The withholding gap (example)
| RSU vest | Amount | % of vest |
|---|---|---|
| Federal withheld | $22,000 | 22% |
| Actual federal tax (35% bracket) | $35,000 | 35% |
| WITHHOLDING GAP | $13,000 | 13% |
If clients have recurring quarterly/monthly vesting, the gap can compound throughout the year. Don’t wait until April — fix it with higher withholding, estimated payments, or additional share sales.
Client handout: key numbers to remember
| Rule of thumb | Number |
|---|---|
| Federal supplemental withholding rate | 22% |
| High-income withholding (> $1M) | 37% |
| If bracket is 32%+, expect to owe more | ~10–15% of RSU income |
| AMT rate | 26% or 28% |
| ISO holding period (from exercise) | > 1 year |
| ISO holding period (from grant) | > 2 years |
Create a one-page “Equity Compensation Tax Cheat Sheet” branded with your firm’s logo. It reinforces your value and prompts better questions from clients.