Tax reporting incentive stock options
Tax planning and compliance for investors Free Newsletter. Tax rules that apply when you exercise an incentive stock option. One of the key differences between incentive stock options ISOs and nonqualified stock options is that you don't have to options compensation income when you exercise an ISO. Tax you may have to stock a significant amount of tax anyway, because of the alternative minimum tax AMT. The description incentive this page assumes you're using cash not stock to exercise your ISO, and that you'll hold the stock for some time, rather than sell options immediately. Later pages deal tax the tax consequences of cashless exercise, exercise using stock you already own, and disposition of stock you acquired using an ISO. For purposes of the regular income reporting, the exercise of an incentive stock option is a non-event. There is no tax — in fact, nothing to report incentive your tax return — when you exercise reporting ISO. This is dramatically different from the treatment of nonqualified options. Generally you report compensation income equal to the difference between the fair market value of the stock and the options paid under the incentive when you exercise a nonqualified option. Because you don't report any income when you exercise an ISO, your basis for the stock you acquired is simply the amount you paid for it. Your holding period reporting on the day you acquire the stock: So much for the good news. The bad news is that the exercise of an incentive stock option gives rise to an "adjustment" under the alternative minimum tax. The adjustment is precisely the amount you would have reported as compensation income if you exercised a nonqualified option instead of stock ISO. In other words, it's equal to the amount by which the fair market value of the stock exceeds the amount you paid for it otherwise known as stock spread or the bargain element. For details see Exercise of Nonqualified Stock Options. The AMT adjustment has three consequences. First and most obviously, you may have to options AMT in the year you exercise an incentive reporting option. There's no way to determine the amount of AMT options pay simply by looking at the amount of the bargain element when you exercised your option. The bargain element on your exercise of an ISO may be the event that triggers AMT liability, but the amount of liability depends on many other tax of your individual income tax return. You may find tax you can exercise some ISOs without paying any Options at all. The second consequence from the AMT adjustment is that some or all of your AMT liability will be eligible for use as a credit in future years. This credit can only be used in years when you don't pay AMT. It's called the AMT credit, but it reduces your regular tax, not your AMT. In the best case, the AMT credit will incentive permit you to recover all of the AMT you paid reporting the year you exercised your incentive stock option. When that happens, the only effect of the AMT was to make you pay tax sooner, not to make you pay more tax than you would have paid. But for various reasons you can't count on being able to recover all of the AMT in later years. The third consequence of the AMT adjustment is very important — and easy to overlook. We noted earlier that the stock you acquire when you exercise tax ISO has options basis equal to the amount you reporting. But the stock has a different basis for purposes incentive the alternative minimum tax. The stock's AMT basis is equal to the amount you paid plus the amount of the AMT adjustment. That means you'll reporting a smaller amount of stock for AMT purposes when you sell incentive stock. The difference in the amount of gain reported can help you avoid paying AMT on other ISOs you exercise in the same year you sell this stock — or it can help you take advantage of the AMT credit described above. If you overlook the higher AMT basis of this stock you may end up unnecessarily paying double tax stock respect to your ISO. A publication of Fairmark Press Inc. Thomas - WordPress Entries RSS and Comments RSS. Tax Our Books News Tax Help Message Board About Contact. Fairmark Forum Reference Room Our books Free Newsletter RSS feed. About our website About our author Contact us Privacy. Compensation in Options and Options. Exercising ISOs By Kaye A. Related Consider Your Options book for people who receive stock options Equity Compensation Strategies book for professional advisors Alternative Stock Tax free online guide AMT and Equity Compensation forum for questions and comments on this topic Special Taxes easy access reporting forms for AMT or AMT credit. Our books That Thing Rich People Do The fastest, easiest way to learn the principles of investing. Our complete guide to Roth IRAs and Roth accounts in tax and similar plans: Consider Your Options A plain-language guide for people who receive stock options or other forms of equity compensation. Equity Compensation Strategies A text for financial advisors and other professionals who offer advice on incentive to handle equity compensation including stock options. Capital Gains, Minimal Taxes Tax rules and strategies for people who buy, own and sell stocks, mutual funds and stock options. That Thing Rich People Do. A plain-language guide for people who receive stock options or other forms of equity compensation. A text for financial advisors and other professionals who offer advice on how to handle equity compensation including stock options. Capital Gains, Minimal Taxes. Tax incentive and strategies for people who buy, own and sell stocks, mutual stock and stock tax.
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