Another problem with the alternative minimum tax.

June 19, 2001 2:54 PM

Another problem with the alternative minimum tax. One of the problems with this tax was discussed back in May when it was realized that the AMT would substantially cut into the tax rebates of many. Now there is a new twist: People who did not cash out stock options before the downturn and are now sitting on a tax bill larger than all their assets combined.
posted by Nothing (6 comments total)

Okay this scares the ever living shit out of me and is why I hate (repeat: hate) our tax system. It's o goddamned convoluted. Does ANYONE know of any good resources on the net about ISOs as they relate to taxes? I'm going to do a Google search, so don't waste a post providing me with that link.

Short situation: Working for a private company and not sure when/if I should excersize my options (risk of business failure aside). Is it better to do it sooner or later, if you're just going to end up holding them for a while. Help!
posted by fooljay at 4:18 PM on June 19, 2001

This one isn't bad -- Quicken.com has all sorts of (relatively) easy-to-read tax planning information.

By ISOs I assume you mean Incentive Stock Options, rather than NQSO, or Non-Qualified Stock Options. The former are generally given to executives and the latter to the regular employees of a company. Basically, ISOs are taxed as Capital Gains and subject to AMT rules and NQSOs are taxed as ordinary income and not subject to AMT. If you truly are 'working for a private company' and not CEO of said company, you probably received NQSOs and the AMT issue is moot.

These guys got in trouble because they had ISOs and the AMT rules in effect made them NQSOs on which they had to pay tax the year they exercised the options. Pretty much, the executives had to treat their options just like us peons would. I don't feel bad for them at all.

I'm hesitant to give any advice to you, fooljay, because there's a lot of variables that must be taken into account (your marginal tax rate, number and amount of options that you have, if the options are truly ISOs or if they're NQSOs, if you anticipate the company's stock price to go up or down, among others), but basically you'll probably want to exercise as soon as possible and then hold on to the stock because the capital gain tax rate (what you'll eventually pay on the difference between the stock price when you exercise and the stock price when you sell) is generally less than your marginal income tax rate (what you'll pay this year on the difference between the stock price when you exercise and the grant price of the options). If you need cash to pay the tax resulting from exercising the options, sell some of the stock next April. If you're really concerned, find a local CPA and go talk to them about it.

Disclaimer: Don't sue me if you go and act on this advice. I have little or no information about your personal tax situation and am basing my opinion on general tax planning principles.
posted by OneBallJay at 5:25 PM on June 19, 2001

Thanks accountingboy. Don't worry I don't trust any one person's opinion implicitly. :-)

They are indeed ISOs, but I'm not the CEO, although I've been told like I act like one on many occasions. :-) I am management though. Just not the top dog in the pound.

Barring a failure of the business (which I see to be remote) the stock's valuation will most likely go up and may go up significantly (if I and the people around me do our jobs right).

Finding a CPA may be a very wise idea. Thanks!
posted by fooljay at 5:56 PM on June 19, 2001

There is no tax obligation on unexercised options. What happened to these guys was that they exercised their options and bought and held onto the stock.

This realized a gain, creating a tax liability. They did this expecting that the stock would rise even more, and expecting to sell the stock later for an even bigger gain.

However, what actually happened was that the stock then declined. But this did not change their original tax liability.

Fooljay, if you hold unexercised options, then none of this applies to you.
posted by Steven Den Beste at 8:12 AM on June 20, 2001

accountingboy, stock options given to regular employees at silicon valley startups are usually ISOs. I know of very few people who got NQSOs, and a whole lot of people with ISOs.

Most of the people who got screwed on AMT were indeed regular people who were given ISOs, not executives, but were not given any advice on how to deal with them. Companies specifically do not tell employees how to handle stock options because of fear of liability. All that employees ever heard at the time were rumors from friends that you should exercise to limit future capital gains -- without knowing or without fully understanding the tax implications. Or they understood them and chose to take the risk because the stock market was going up up up and was going to continue to go up up up, wasn't it?

It is not necessarily AMT that is at fault in this case. The problem here is that a lot of poeple got into options without understanding the tax implications, and then stayed in the stock without understanding the tax implications. They could have sold the stock before the end of the year and avoided the tax bill. These people really needed to talk to a CPA before exercising thier options, and they needed to talk to a CPA before the end of the tax year. All of these problems could have been avoided.

I am not a CPA, but I've done a lot of financial advisor-type work, and I know a lot of people with stock options. When you are granted options, you NEED TO HIRE A CPA. You are no longer in the realm where TurboTax will work for you. You need professional advice on this. Really. Go. Do it.
posted by mourning-glory at 9:38 AM on June 20, 2001

Mourning-glory, I will. I'm convinced. Steven, all of my options are currently unexcersized but I'm about to excersize all of my vested options (and obviously hold since we're still private) which is why this article scared the living beejeezus out of me...
posted by fooljay at 6:43 PM on June 20, 2001